Fund Balance & Bond Rating

You may wonder how the City’s fund balance relates to our bond rating. There is not an exact equation in order to retain or achieve a specific rating. Bond analysts would review our level of reserves (all reserves, including cash flow, debt, unreserved, etc.) as part of their review of our entire financial and management picture.

Fund Balance Policy

If we have a fund balance policy (which we do) and are in compliance with that policy (which we are), all the better. If we are not in compliance with that policy, we need to have a plan to get back within the policy. There are dozens of factors that go into a bond rating. How we fare in one category will not likely be the sole determining factor to change our bond rating. However, it could cause the rating agents to dig a little deeper in one category or another.

It is helpful to remember that the rating agents are supposed to provide a level of due diligence for the bond buyer. The bond buyer is actually loaning us money for a specific project. The rating process is intended to assess the borrower's willingness and ability to pay back the loan, so the bond buyer can evaluate the risk and, with knowledge, loan money at a rate of return commensurate with the risk they are willing to take. The more reliable the repayment (i.e. higher rating) the lower the risk and lower the rate that is required. The more risky the repayment (i.e. lower rating), the higher rate of return is required, so a higher interest rate must be paid by the government.

Cashflow Reserve

It was with this in mind that we established the debt service reserve above and beyond the Cashflow reserve (which is 25% of expenditures). We have the Cashflow reserve to meet payrolls and accounts payable check runs. We have a debt service reserve to assure that funds are set aside equal to the amount of 1 year of governmental debt service payments so we can be sure funds are available for debt payments.