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Attachment B Potential Pitfalls of Transferring Excess Cash Reserves One potential outcome fromcreating a Cash Reserve Fund involvesthe transfer of excess cash from a Fund based on the current year’s calculation, only to find that a year or two later that the same fund is now below target reserve levels. The City’s discretionary funds are accompanied by uncertainty and business risk when it comes to revenue streams and unexpected expenditureswhich can have a negative impact on the Funds’ financial condition. For example, the City typically experiences declining non-tax revenues during periods of economic downturn. Yet, most costs will continue leading to a drop in cash reserve levels. Under this circumstance, we could simply reverse the transfer of cash to restore the Fund to the prescribed level. But what if the excess cash was spent shortly after being transferred away? What if, as suggested earlier, it was used to provide property tax relief or for a new spending initiative? If so, any return of those excess funds would no longerbe possible.This potential outcome and other pitfalls should be a consideration if a Cash Reserve Fund is put in place. The Role of Cash Reserves in Preserving the City’s Financial Strength As touched on at the July Finance Commission Meeting, cash reserves play a key role in demonstrating the strength of the City’s financial condition includingthe ability to not only provide for future operations, but also address contingencies and unforeseen circumstances. Perhaps the most comprehensive and independent assessment of a City’s financial strength is the credit risk assigned by bond rating agencies such as Moody’s or Standard & Poor’s (S&P). Similar to an individual’s FICO Score, a bond rating is a reflection of how disciplined a City is in managing its finances and how prepared it is to handle future obligations. The City current enjoys an AAA bond rating (credit rating) from both Moody’s and S&P –the highest rating available. At the July meeting, the Commission received the latest reports from these agencies along with a recent independent assessment from Springsted Municipal Advisors to get a sense of whether our cash reserves were sufficient to maintain this bond rating. Important takeaways from these reports included: 71&!pg!uif!Djuzt!cpoe!sbujoh!tufnt!gspn!locally.dpouspmmfe!gbdupst!tvdi!bt!uif!tusfohui!pg! uif!Djuzt!dbti!sftfswft-!cvehfubsz!qfsgpsnbodf!)j/f/!cbmbodfe!cvehfut*-!boe!gpmmpxjoh! ftubcmjtife!qpmjdjft/!Uif!sfnbjojoh!gbdupst!bsf!efufsnjofe!cz!sfhjpobm!boe!tubuf!fdpopnjd! dpoejujpot/ Nppezt!sfmfbtfe!jut!nptu!sfdfou!dpnnfout!po!uif!Djuzt!gjobodjbm!dpoejujpo!jo!Kbovbsz!pg! uijt!zfbs-!xijdi!xbt!cbtfe!po!uif!Djuzt!3127!Boovbm!Sfqpsu/!Pg!uif!gpvs!sbujoh!dbufhpsjft! djufe-!Sptfwjmmf!dpnqbsft!gbwpsbcmz!up!puifs!BBB.sbufe!bhfodjft!jo!pomz!pof!dbufhpsz!!uif! mfwfm!pg!dbti!sftfswft/ To summarize, strong levels of cash reserves play a critical role in ensuring that the City’s bond rating remains at the AAA category. A ratings decline to AA, would have resulted in an estimated $500,000 in additional interest costs for the bonds recentlyissued to finance the Park Renewal Program and new Fire Station.