The Fridley City Council approved the community investment fund policy and transferred money from the general fund to the community investment fund during the Feb. 25 meeting.
Previously, the city maintained a closed bond fund, which aggregates the remaining surplus or deficits of closed debt issues, including street and utility improvements.
“So upon conclusion of a project and the debt service, any remaining monies are collapsed into the closed bond fund,” said Fridley Finance Director Daniel Tienter.
Beginning in the early 1990s, the city began transferring funds from the closed bond fund to “balance” the operating budget.
In 1990, the fund held a cash balance of $8 million. At the end of 2018, the fund has an estimated balance of $3.1 million.
“As a part of the adopted 2019 budget, the council effectively ended the practice of using the closed bond fund as a one -time funding source for operating purposes,” said Tienter.
With the closed bond fund no longer being used for gap financing, the council guided staff to consider alternate uses for the fund.
City staff then established guidelines and goals for possible uses. Guidelines include avoidance of ad-hoc expenditures and/or transfers, long-term sustainability for the fund and support for city activities and projects.
Using those goals, various options for the money include an emergency reserve, a capital equipment funding source or used as an inter-fund loan mechanism.
“After internal discussion and review with the city manager, city staff ultimately settled on using the internal loan fund mechanism,” said Tienter.
Based on the process, staff recommended to the council that they approve the creation of a community investment fund as an inter-fund financing mechanism.
“Generally, the fund and the policy would allow the city to an inter-fund loans to the water and sanitary sewer funds,” said Tienter.
Those funds would then replace average-sized bond issues, which are typically used to support more expensive capital investment projects.
“The public utility funds would then, in turn, repay the inter-fund loans with all the typical interest they would ordinarily pay, allowing the Community Investment Fund to issue new loans to support future projects,” said Tienter. “This is known as revolving.”
The fund would only be permitted to support capital and debt service expenditures related to public utilities in the form of inter-fund loans and transfers to the parks capital improvement fund.
“Over time, typically 10 to 15 years, depending on the size of the loan, the public utility would pay those inter-fund loans with interest,” said Tienter.
The funds would also be permitted to support reasonable administrative costs.
To support the proposed activity, the fund would need additional funding.
Given the current fund balance, and an anticipated contribution for 2018, the general fund would transfer $900,000 to the new fund.
Additionally, any unassigned general fund balance in excess of the upper fund balance threshold would be transferred to the fund on an annual basis.
The fund would also receive proceeds from interest or investment earnings, fees obtained through the issuance of private activity bonds, unanticipated payment or “windfalls” to the city and any other money appropriated by the council.
In order to maintain the solvency of the fund, Tienter said that the policy required a minimum fund balance, which would increase over time. By 2026, a minimum of $1 million would be required.
Although the fund was recently created, it is effective as of Dec. 31, 2018.