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03/23/2021 03 Fund Balance PolicyB US INE S S O F T HE C I T Y C O UNC IL YAK I M A, WAS HI NG T O N AG E ND A S TAT E M E NT I tem No. 3. F or Meeting of: March 23, 2021 I T E M T IT L E :Fund Balance P olicy S UB M IT T E D B Y:S teve Groom, Director of F inance and B udget S UM M ARY E X P L ANAT IO N: This is a new policy, a fundamental best practice which, when in place, would contribute f avorably in reviews of the city's financial governance and management in such areas as annual audit, credit rating, bond issuance, and annual budget. The C ity of Yakima has not previously had a formal council-approved f und balance policy, although it has been a topic of concern for many years and city councils have earnestly endeavored to steward the assets of the city with care and to improve the city's f inancial health. The attached F und B alance P olicy draws heavily on G F O A (Government F inance Of f icers A ssociation) best-practice whitepapers, also attached. S taff will provide explanation and illustration for the policy, particularly the proper treatment of Enterprise F und reserves, which represents the main new policy distinction to benef it the city. I T E M B UD G E T E D:NA S T RAT E G I C P RIO RIT Y:Public Trust and A ccountability AP P RO V E D F O R S UB M I T TAL B Y T HE C IT Y M ANAG E R RE C O M M E ND AT IO N: A dopt F und B alance Policy or direct staf f to bring to regular council meeting for adoption AT TAC HM E NT S: D escr iption Upload D ate Type Proposed Fund Balance Policy 2/12/2021 Exhibit PowerPoint presentation 3/4/2021 Presentation GFOA General Fund Guideline 2/12/2021 Backup Material GFOA Enterprise Fund Guideline 2/12/2021 Backup Material 1 p. 1 of 4 City of Yakima Policy Number:________________ Department: Finance Authorized by: City Council Effective Date: XX/XX/2020 Reissue Date: New policy Supersedes: N/A (New Policy) Policy: Fund Balance for General Fund and Operating Reserve Requirements for Enterprise Funds I. Purpose The Fund Balance Policy of the City of Yakima is authorized, approved by, the City Council. The purposes of this Policy are: • To establish reserve objectives and parameters necessary to safeguard public funds entrusted to the City of Yakima, • To articulate City Council’s intent for the governance over city finances • To communicate clear policy and strategy guidelines for city financial administration • To demonstrate to citizens, taxpayers and voters a transparent and accountable stewardship plan. • To establish a fund balance target for the General Fund and an operating reserve requirement for the Enterprise Funds. II. General Financial Goals a. To provide a financial base sufficient to sustain municipal services to maintain the social well-being and physical conditions of the City. b. To provide a cushion for seasonal cash flow fluctuations, a financial safety net in the event of natural disasters, local and regional emergencies, economic downturns, withstand local and regional economic trauma, and to respond to other unforeseen circumstances. c. To maintain available financial resources as a measure of the sound fiscal condition of the primary government fund, for consideration by bond rating agencies when evaluating the City’s credit worthiness, and the governing body when making budgetary decisions. 2 p. 2 of 4 d. To consider and provide for the needs of future generations in the Yakima community. The distinction between “Fund Balance” and “Working Capital” comes from Government Accounting Standards which require modified accrual accounting for governmental funds and full accrual accounting for enterprise funds; this policy addresses each separately. Operating Reserve, or Working Capital, is the primary measure for evaluating continued creditworthiness and budgetary decisions for Enterprise Funds. III. General Fund’s Fund Balance Target: a. Target is to achieve and maintain a Fund Balance of at least 16.7% of the Total Expenditures, representing 2 months of annual spending. b. Fund Balance equals Total Assets minus Total Liabilities, on the Statement of Revenues, Expenditures and Changes in Fund Balances – Government Funds in the City’s Comprehensive Annual Financial Report (CAFR). c. Financial Reporting Definitions. Governmental Accounting Standards Board (GASB) Statement 54 distinguishes fund balance classified based on the relative strength of the constraints that control the purposes for which specified amounts can be spent. Beginning with the most restrictive constraints, fund balance amounts will be reported in the following categories: i. Nonspendable fund balance – amounts that are not in a spendable form (e.g., inventory) or are legally or contractually required to be maintained intact (e.g., permanent fund principal). ii. Restricted fund balance – amounts that can be spent only for the specific purposes stipulated by external parties either constitutionally or through enabling legislation (e.g., grants or donations). iii. Committed fund balance – amounts that can be used only for the specific purposes determined by a formal action of the City Council. Commitments may be changed or lifted only by referring to the formal action that imposed the constraint originally (e.g., the council’s commitment in connection with future construction projects). iv. Assigned fund balance – amounts intended to be used by the government for specific purposes. Intent can be expressed by the City Council or by a designee to whom that governing body delegates the authority. (In governmental funds other than the general fund, assigned fund balance represents the amount that is not restricted or committed but by definition, being account for in a separate fund, are intended to be used for the purpose of that fund). v. Unassigned fund balance – includes all amounts not contained in other classifications and is the residual classification of the general fund only. Unassigned amounts are available for any legal purpose. 3 p. 3 of 4 d. Should City Council determine that it is prudent to mitigate current or anticipated risks (e.g., significant revenue shortfalls, natural disasters, significant economic downturns, or unanticipated expenditures), a budget amendment may be approved by City Council for current-year expenditures that decrease the General Fund’s fund balance below target. e. During every annual budget review and approval process, City Council shall consider and determine what dollar amount, or percentage of operating expenses, shall be identified in the adopted budget to add to a revenue shortfall reserve for unforeseen future circumstances. f. If General Fund’s fund balance falls below target, then the next year’s budget must include projections of General Fund’s fund balance levels to be considered as part of the annual budget process and the budget must include a plan to restore the General Fund’s fund balance to target. g. Cashflow rationale. The General Fund’s principle sources of funds are Property Tax, Sales Tax and Utility & Franchise Taxes. The bulk of Property Taxes are received every year in April and October; Sales Tax and Utility & Franchise Taxes are received more evenly, although with some seasonality. Debt payments are disbursed mostly in June and December. IV. Enterprise Funds’ Operating Reserve Target: a. Target is to maintain an Operating Reserve equivalent to 25% of total annual operating expenses. b. Operating Reserve is Current Assets minus Current Liabilities, on the Statement of Net Position, Proprietary Funds, in the City’s CAFR. c. Unlike the general fund, which expenses long-term assets in the period purchased instead of depreciating, much of the asset value in an enterprise fund is not spendable. A large part of an enterprise fund’s net position could be fixed assets which is not liquid, not a usable reserve. Whereas Fund Balance is simply akin to subtracting total liabilities from total assets, a Working Capital method of calculating Operating Reserves eliminates long-term assets and long-term liabilities from the calculation. d. If the operating reserve is projected to fall below the target, then appropriate action, including rate increases and/or reductions in spending, will be taken to restore the reserve to the target level at the time of annual budget adoption. V. Reporting and Forecasting a. At time of annual audit completion, the Finance Director shall report the General Fund’s fund balance and the Enterprise Funds’ operating reserves to City Manager and City Council. b. Mid-period fund balance calculations prove difficult, due to the cyclical aspect of inflows and outflows, the complex nature of one-time accruals and 4 p. 4 of 4 allocations available and completed only during year-end closing. Budgetary controls should instead be relied on during interim periods; quarterly financial revenue and expense reporting shall serve to ensure budgeted fund balance targets are on track. c. At time of budget adoption, the Finance Department and City Manager will include forecasted General Fund’s fund balance and Enterprise Funds’ Operating Reserves in the material presented to City council prior to budget adoption. VI. Policy guidance. a. The accounting policies of the City of Yakima conform to Generally Accepted Accounting Principles (GAAP) and the City adopts the pronouncements of the Governmental Accounting Standards Board (GASB) as the nationally-accepted standard-setting body for establishing governmental accounting and financial reporting principles. b. The city considers best practice advisories (whitepapers) of the Government Finance Officers Association (GFOA) to apply uniform standards and procedures of governmental finance management within the governmental accounting sector to the City’s specific circumstances. c. The responsibility for designating funds to specific classifications shall be as follows: i. Committed Fund Balance – the City Council, as the City’s highest level of decision-making authority, shall establish, modify, or rescind a fund balance commitment by resolution. ii. Assigned Fund Balance – the City Manager or the Director of Finance and Budget may assign fund balance to a specific purpose. d. Order of Expenditure of Funds. When an expenditure can be charted to multiple categories of fund balance (e.g., a project is being funded partly by a grant, funds set aside by the City, and unassigned fund balance), the most restricted category will be used first, then the next-most restricted category(ies). 5 Clear – Reliable – Trustworthy Study Session Fund Balance Policy 6 Clear – Reliable – Trustworthy Fund Balance Policy The purpose of this policy is o Financial Sustainability A very short policy – only 4 pages 7 Clear – Reliable – Trustworthy Fund Balance Policy Purpose: stewardship, management (p. 1) Targets: general and enterprise type funds (pp. 3,4) Reporting: annual audit and budget (p. 3) Plan for recovery: address annually when budgeting (p. 3) 8 Clear – Reliable – Trustworthy Fund Balance is the most common measure of fiscal health Assets – Liabilities = Fund Balance The Basics 9 Clear – Reliable – Trustworthy What’s Changing? By aligning the City’s Policy on Enterprise Fund reserves to best practices 1. It’s more relevant 2. Our score actually improves Compare the “before” and “after” on the next two slides, first a theoretical example, then our city’s actual situation 1 2 10 Enterprise Funds Why/How “Working Capital” matters 1 2 •Some assets aren’t “spendable” •Can even be in trouble •Use Current Assets minus Current Liabilities 11 Enterprise Funds Why “Working Capital” matters 1 2 12 Clear – Reliable – Trustworthy Fund Balance Policy Policy action being requested: 1)Review the recommendation 2)Approve the policy 3)Revisit twice annually, audit and the budget 13 Clear – Reliable – Trustworthy Fund Balance Policy Clear – Reliable – Trustworthy An increasingly well-managed city 14 1/15/2019 Fund Balance Guidelines for the General Fund http://www.gfoa.org/print/5024 1/4 In the context of financial reporting, the term fund balance is used to describe the net position of governmental funds calculated in accordance with generally accepted accounting principles (GAAP). Budget professionals commonly use this same term to describe the net position of governmental funds calculated on a government’s budgetary basis.1 While in both cases fund balance is intended to serve as a measure of the financial resources available in a governmental fund; it is essential that differences between GAAP fund balance and budgetary fund balance be fully appreciated. 1. GAAP financial statements report up to five separate categories of fund balance based on the type and source of constraints placed on how resources can be spent (presented in descending order from most constraining to least constraining): nonspendable fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund balance.2 The total of the amounts in these last three categories (where the only constraint on spending, if any, is imposed by the government itself) is termed unrestricted fund balance. In contrast, budgetary fund balance, while it is subject to the same constraints on spending as GAAP fund balance, typically represents simply the total amount accumulated from prior years at a point in time. 2. The calculation of GAAP fund balance and budgetary fund balance sometimes is complicated by the use of sub-funds within the general fund. In such cases, GAAP fund balance includes amounts from all of the subfunds, whereas budgetary fund balance typically does not. 3. Often the timing of the recognition of revenues and expenditures is different for purposes of GAAP financial reporting and budgeting. For example, encumbrances arising from purchase orders often are recognized as expenditures for budgetary purposes, but never for the preparation of GAAP financial statements. The effect of these and other differences on the amounts reported as GAAP fund balance and budgetary fund balance in the general fund should be clarified, understood, and documented. 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. 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 unrestricted fund balance in the general fund. Fund Balance Guidelines for the General Fund BACKGROUND: RECOMMENDATION: BEST PRACTICE 15 1/15/2019 Fund Balance Guidelines for the General Fund http://www.gfoa.org/print/5024 2/4 GFOA recommends that governments establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund for GAAP and budgetary purposes.3 Such a guideline should be set by the appropriate policy body and articulate a framework and process for how the government would increase or decrease the level of unrestricted fund balance over a specific time period.4 In particular, governments should provide broad guidance in the policy for how resources will be directed to replenish fund balance should the balance fall below the level prescribed. Appropriate Level. The adequacy of unrestricted fund balance in the general fund should take into account each government’s own unique circumstances. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in the unrestricted fund balance. Articulating these risks in a fund balance policy makes it easier to explain to stakeholders the rationale for a seemingly higher than normal level of fund balance that protects taxpayers and employees from unexpected changes in financial condition. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.5 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.6 Furthermore, a government’s particular situation often may require a level of unrestricted fund balance in the general fund significantly in excess of this recommended minimum level. In any case, such measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too much emphasis upon the level of unrestricted fund balance in the general fund at any one time. In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should consider a variety of factors, including: 1. The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unrestricted fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile); 2. Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state budget cuts); 3. The potential drain upon general fund resources from other funds, as well as, the availability of resources in other funds; 4. The potential impact on the entity’s bond ratings and the corresponding increased cost of borrowed funds; 5. Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund balance to compensate for any portion of unrestricted fund balance already committed or assigned by the government for a specific purpose). Governments may deem it appropriate to exclude from consideration resources that have been committed or assigned to some other purpose and focus on unassigned fund balance, rather than on unrestricted fund balance. Use and Replenishment. The fund balance policy should define conditions warranting its use, and if a fund balance falls below the government’s policy level, a solid plan to replenish it. In that context, the fund balance policy should: 1. Define the time period within which and contingencies for which fund balances will be used; 2. Describe how the government’s expenditure and/or revenue levels will be adjusted to match any new economic realities that are behind the use of fund balance as a financing bridge; 3. Describe the time period over which the components of fund balance will be replenished and the means by which they will be replenished. 16 1/15/2019 Fund Balance Guidelines for the General Fund http://www.gfoa.org/print/5024 3/4 Generally, governments should seek to replenish their fund balances within one to three years of use. Specifically, factors influencing the replenishment time horizon include: 1. The budgetary reasons behind the fund balance targets; 2. Recovering from an extreme event; 3. Political continuity; 4. Financial planning time horizons; 5. Long-term forecasts and economic conditions; 6. External financing expectations. Revenue sources that would typically be looked to for replenishment of a fund balance include nonrecurring revenues, budget surpluses, and excess resources in other funds (if legally permissible and there is a defensible rationale). Year-end surpluses are an appropriate source for replenishing fund balance. Unrestricted Fund Balance Above Formal Policy Requirement. In some cases, governments can find themselves in a position with an amount of unrestricted fund balance in the general fund over their formal policy reserve requirement even after taking into account potential financial risks in the foreseeable future. Amounts over the formal policy may reflect a structural trend, in which case governments should consider a policy as to how this would be addressed. Additionally, an education or communication strategy, or at a minimum, explanation of large changes in fund balance is encouraged. In all cases, use of those funds should be prohibited as a funding source for ongoing recurring expenditures. Notes: 1. For the sake of clarity, this recommended practice uses the terms GAAP fund balance and budgetary fund balance to distinguish these two different uses of the same term. 2. These categories are set forth in Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. 3. Sometimes restricted fund balance includes resources available to finance items that typically would require the use of unrestricted fund balance (e.g., a contingency reserve). In that case, such amounts should be included as part of unrestricted fund balance for purposes of analysis. 4. See 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). 5. In practice, a level of unrestricted fund balance significantly lower than the recommended minimum may be appropriate for states and America’s largest governments (e.g., cities, counties, and school districts) because they often are in a better position to predict contingencies (for the same reason that an insurance company can more readily predict the number of accidents for a pool of 500,000 drivers than for a pool of fifty), and because their revenues and expenditures often are more diversified and thus potentially less subject to volatility. 6. 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 unrestricted fund balance to either revenues and/or expenditures, that decision should be followed consistently from period to period. The County of San Diego, CA was awarded the GFOA Award for Excellence for outsanding use of GFOA's Best Practice on Fund Balance Guidelines for the General Funds. To learn more about the County's implementation process, please visit their award page. 17 1/15/2019 Fund Balance Guidelines for the General Fund http://www.gfoa.org/print/5024 4/4 203 N. LaSalle Street - Suite 2700 | Chicago, IL 60601-1210 | Phone: (312) 977-9700 - Fax: (312) 977-4806 This best practice was previously titled Appropriate Level of Unrestricted Fund Balance in the General Fund. 18 1/15/2019 Working Capital Targets for Enterprise Funds http://www.gfoa.org/print/425 1/4 Enterprise funds distinguish between current and non-current assets and liabilities. It is possible to take advantage of this distinction to calculate working capital (i.e., current assets less current liabilities). The measure of working capital indicates the relatively liquid portion of total enterprise fund capital, which constitutes a margin or buffer for meeting obligations. It is essential that a government maintain adequate levels of working capital in its enterprise funds to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenses) and to ensure stable services and fees. Working capital is a crucial consideration, too, in long-term financial planning. Credit rating agencies consider the availability of working capital in their evaluations of continued creditworthiness. Likewise, laws and regulations may speak to appropriate levels of working capital for some enterprise funds. GFOA recommends that local governments adopt a target amount of working capital to maintain in each of their enterprise funds. Ideally, targets would be formally described in a financial policy and/or financial plan. GFOA recommends that governments use working capital as the measure of available margin or buffer in enterprise funds. Although as previously stated, working capital is defined as current assets minus current liabilities, government finance officers should be aware of certain characteristics of working capital that affect its use as a measure. Specifically, the current assets portion of working capital includes assets or resources that are reasonably expected to be realized in cash (e.g., accounts receivable) or consumed (e.g., inventories and prepaids) within a year, which leads to two considerations for an accurate calculation of working capital: Strength of collection practices. An appropriate allowance for uncollectibles should be established and the amount of the receivable that is expected to be collected in cash within one year should be determined in a manner that is consistent with the collection practices of the government. If the accounts receivable collection practices of the enterprise fund are inconsistent or weak, then less of the accounts receivable amount should be reported as current assets. Historical consumption of inventories and prepaids. The amount of inventories and prepaids included in current assets should be a realistic estimate of the amount that will be Working Capital Targets for Enterprise Funds BACKGROUND: RECOMMENDATION: BEST PRACTICE 19 1/15/2019 Working Capital Targets for Enterprise Funds http://www.gfoa.org/print/425 2/4 consumed in one year based on a historical usage pattern and current operating levels (inventories) or based on the time periods to which the items relate (prepaids). Because the purposes, customers, and other characteristics of enterprise funds can vary widely, GFOA recommends that governments develop a target amount of working capital that best fits local conditions for each fund. However, GFOA recommends that under no circumstances should the target for working capital be less than forty-five (45) days worth of annual operating expenses1 and other working capital needs of the enterprise fund.* A target of 45-days would only be appropriate for those enterprise funds with the least amount of need for cushion or buffer. In order to arrive at a customized target amount of working capital, governments should start with a baseline of ninety (90) days worth of working capital and then adjust the target based on the particular characteristics of the enterprise fund in question (using 45 days as the minimum acceptable level). The primary characteristics to think about when customizing a working capital target are presented below. The appendix to this Best Practices provides more detailed considerations for these characteristics as they pertain to common types of government enterprise funds. Support from general government. Some enterprise funds may be supported by general taxes or transfers from a general government. These enterprise funds may require lower levels of working capital if they are supported by these contributors. For a heavily subsidized enterprise fund the 45-day minimum working capital recommendation contained in this Best Practice might be met through support from the general government, if a financial buffer or cushion for the enterprise fund is to be provided by the general government (or other outside contributor). Transfers out. If the enterprise fund is expected to make a transfer to the general government or to some other fund, then this sort of claim on the enterprise funds assets may call for higher levels of working capital to maintain flexibility. Transfers could include an enterprise funds contributions to overhead/support functions, subsidies granted to other operations, or any other transfer of resources. Regardless of the rationale of the transfer, governments should take into account the claim on working capital when setting a target amount. Cash cycles. Does the enterprise fund experience large peaks and valleys in its cash position during the year? For example, a water enterprise fund may experience significantly higher levels of cash on hand during the summer months compared to the winter. Volatile cash cycles call for higher levels of working capital. Another consideration is the length of the billing cycle. A longer billing cycle would call for higher levels of working capital because the enterprise fund will have longer durations between major infusions of cash. Customer concentration. Is the enterprise fund dependent on a few customers for a large portion of its revenues or is the customer base diversified? For example, a port enterprise fund may be dependent on a few major shippers or commerce in a niche product. Lower customer concentration may mean that the enterprise fund can safely operate with lower levels of working capital. Demand for services. Does the enterprise fund face a steady demand for service or is demand potentially volatile, thereby leading to volatility in of income? For example, the demand for utility services is steady compared to demand for air travel. Also consider the impact of competitive position on demand. Direct competitors or the availability of reasonable substitutes could lead to greater volatility in demand for the enterprise funds services. More volatility implies greater need for working capital margins. Control over rates and revenues. Does the enterprise fund have the ability to change rates, implement new charges, or otherwise raise revenues from its customers in a simple fashion? For example, transit enterprise funds are often constrained from raising rates by political 20 1/15/2019 Working Capital Targets for Enterprise Funds http://www.gfoa.org/print/425 3/4 pressure. Other enterprise funds may be subject to a rate control board. Those that face competitors in their market may have less effective control over their rates and revenues. More revenue constrained enterprise funds may need higher levels of working capital. Asset age and condition. What is the age and condition of the enterprise fund's infrastructure? Older infrastructure has greater exposure to extraordinary repair needs. Enterprise funds with newer and/or well maintained capital assets may be able to operate with less working capital than other enterprise funds. Volatility of expenses. Are the expenses of the enterprise fund volatile or does the enterprise fund have a high degree of control over its expenses? For example, the expenses of a solid waste enterprise fund tend to be fairly stable throughout the year. In another example, water or sewer enterprise funds may be more vulnerable to large expense spikes from extreme weather. Enterprise funds with more stable expenses can safely operate with less working capital than other enterprise funds. Control over expenses. Consider the enterprise fund's level of fixed and variable costs and the ability to reduce variable costs in response to lower revenues. For instance, if a convention center does not book an event, it does not need to hire temporary help and incur other expenditures in support of the event. An enterprise fund with a high percentage of operational costs which vary depending upon revenues or operating levels may operate with lower levels of working capital. Management plans for working capital. Working capital includes assets, which can include both truly unrestricted resources and resources that have internal limitations placed upon them (e.g., board-designated) and/or that may be committed for future capital spending. These amounts may appear as unrestricted on the balance sheet but, in actuality, may be unavailable in the future to serve as a buffer or tool to help manage financial risk. If these types of limitations exist, the working capital target should be adjusted to arrive at an amount that represents a true amount available as a tool to manage financial risk. Separate targets for operating and capital needs. Depending on the nature of the enterprise fund, governments might also consider designating separate targets for operating and capital needs, especially when the enterprise fund is very capital intensive. For example, there might be a separate amount identified for equipment replacement or debt service. In such a case, targets should be separately evaluated based on the particular features of the isolated amounts. Debt position. Enterprise funds often carry significant amounts of debt, which is used to acquire capital assets. The amount and type of debt an enterprise fund carries can have important ramifications for working capital targets. For example, an enterprise fund with a large amount of variable rate debt may need additional buffer to manage the risk associated with interest rate volatility. In addition, uneven and increasing or lump-sum debt principal payments to be made in future years may raise the amount of working capital that the enterprise fund should maintain. Viewing the amount of working capital in this broader context will help ensure that resources are available to make debt payments as they come due. Notes: 1 The recommendation is to use annual operating expenses which include depreciation expense. If, however, annual depreciation expense is significantly more or less than the anticipated capital outlays of the next period to be paid from working capital consideration should be given to adjusting the benchmark. An appropriate adjusted benchmark may be annual operating expenses - annual depreciation expense + capital outlays of the next period to be paid from working capital. * Subject to the exception for heavily subsidized enterprises, described later in this Best Practice. This best practice was previously titled Determining the Appropriate Levels of Working Capital in Enterprise Funds. 21 1/15/2019 Working Capital Targets for Enterprise Funds http://www.gfoa.org/print/425 4/4 203 N. LaSalle Street - Suite 2700 | Chicago, IL 60601-1210 | Phone: (312) 977-9700 - Fax: (312) 977-4806 22