MRSC has joined with Toni Nelson, Small Cities Specialist, State Auditor's Office, Gayla Gjertsen, Finance Director, City of Tumwater, and Mike Bailey, Finance Director, City of Redmond, to bring you the "Finance Advisor" column. The "Finance Advisor" will feature a new article each month with timely local government finance information and advice you can use.*

Does a new law allow code cities to credit all interest earnings to the general fund?

October 2007

Mike Bailey, Administrator of Finance and Information Services, City of Renton
Toni Nelson, Small Cities Specialist, State Auditors Office
Gayla Gjertsen, Finance Director, City of Tumwater

At first blush, it appears that HB 2161 (which amended RCW 35A.40.050) provides a revenue windfall for code cities. It says that if the city’s funds have been commingled for investment purposes, the interest may be apportioned among the various participating funds or (and here is the new language) “the general or current expense fund as the governing body of the code city determines by ordinance or resolution.” (Non-code cities have had similar language in RCW 35.39.034 since 1981.) Typically a city’s general fund or current expense fund is one of the funds that is most difficult to balance. That is to say, the revenues never seem to cover all the needs. So when we, who are trying to balance these budgets, are told we can now credit all interest revenue to the general fund, that sounds like a revenue windfall.

However, we suggest a word of caution – in fact – we're inclined to toss some cold water on that idea. If you work in a city hall, you are likely familiar with the “Budget Suggestions” handbook produced each year by the Municipal Research and Services Center. This topic is addressed in this year’s publication on page 11. In it the following guidance is given:

Note that the BARS Manual (Vol. 1, Pt. 3, Ch. 12, P. 46) provides a matrix of revenue sources and whether interest on those sources may be allocated to the general fund. In addition, for utility funds, bond covenants or other provisions may require that the interest be allocated to the utility fund. If you have questions, check with your city attorney or bond counsel.

We want to second that opinion. You do not want to pay money to the general fund and then have to reallocate it because you did so in error.

The State Auditor’s office promotes accountability and fiscal integrity as the cornerstones of good government accounting practices. While we often struggle with interpreting the multitude of laws and compliance issues it should be noted the allocation of resources such as interest earnings to the general fund may not always be appropriate and will be subject to review for compliance during the audit process.

The intent of HB 2161 was to give code cities the same options that non-code cities have regarding the allocation of interest. To that extent it has accomplished its goal. However, prior to its passage even non-code cities had to allocate their resources appropriately. If some funds in your investment portfolio are restricted, then the earnings are restricted too. The matrix provided by the auditor’s office clearly defines the revenues considered restricted by statute, although it does not address those restricted by bond covenants.

We lead the annual “Introduction to Municipal Budgeting” workshops sponsored by AWC and WFOA each August. At this year’s workshops, we were asked about this provision numerous times. It seems there was a lot of interest in crediting the interest (a bit of a pun) to the general fund.

In addition to providing new authority to code cities for the allocation of interest, passage of this law may also have brought existing provisions of RCW 35A.40.050 (and RCW 35.39.034) to the attention of city officials. These allow cities to combine the balances in their various funds to maximize their investment potential. Tools for investments by Washington cities are numerous. The Washington State Treasurer’s Local Government Investment Pool, the Public Deposit Protection Commission, and other tools make our jobs in this respect easier than it is in other states. By combining the money from all funds into an investment pool, we can manage the total portfolio as a whole. This allows for large investments which can lead to larger rates of return. The way we would recommend allocating interest from this combined portfolio to the funds that would be legally entitled to receive that interest would be to periodically assess the shares that each fund owns of the pool. Use that percentage to allocate interest earnings from the pool for that same period. A minimum period of time would be a month. Attention to detail and monitoring the mix of fund balances within your portfolio will help to assure compliance in addition to allowing for possible increase in revenue for the general fund.

By combining the cash from each fund into an investment pool for the city you can maximize the investment returns while still making sure that each fund which is legally entitled to that interest receives its fair share. If you are not sure where to credit the interest from funds other than utility and bond funds, give MRSC or your city attorney a call, or you can access the SAO Helpdesk . If you have questions about interest allocation and utility or bond funds, call your bond counsel. If you have interest that could be credited to the general fund but currently is not, you have a great topic for a financial policy discussion.

Toni Nelson is the "Small Cities Specialist" for the Washington State Auditor's Office, providing both on and off site financial training and assistance to smaller cities and towns throughout the state. Ms. Nelson has been working with the Auditors office for 6 years and prior to that was the Clerk/Treasurer for a small town for 9 years. She has co-authored the "Small Cities Manual" a detailed reference guide for new clerk/treasurers on governmental accounting procedures and presents numerous training workshops throughout the state for AWC, WFOA, WMTA, WMCA and local/regional organizations such as EWFOA and SCWMCA. Ms. Nelson is also a member of and conference track coordinator for the WFOA Education Committee.

Mike Bailey is currently the Administrator of Finance and Information Services for the city of Renton. Previously, he worked as the Director of Finance for the city of Lynnwood for six years. Mr. Bailey also served as president of the Washington Finance Officers Association and is the Vice Chair of the GFOA Budget Committee. An experienced CPA and GFOA budget reviewer, Mr. Bailey co-founded the annual Budget and Fiscal Management Workshops held each summer. Mr. Bailey conducts numerous workshops and has authored various articles on local government finance, including Effective Budgeting in Washington State Cities published by the Association of Washington Cities.

Gayla L. Gjertsen has been the Finance Director for the City of Tumwater for over 15 years and was previously the Director of Administration for the City of Milton for 13 years. She has also served as president of the Washington Finance Officer's Association. Gayla has been a presenter at the annual Budget and Fiscal Management Workshops held each summer for many years, and periodically conducts other workshops and writes about local government finance issues.

*The Articles appearing in the "Finance Advisor" column represent the opinions of the authors and do not necessarily reflect those of the Municipal Research & Services Center.