MEMORANDUM

Members, Kenai Borough Assembly

Thru: John J. Williams, Mayor

From: Craig Chapman, Finance Director

Date: April 4, 2006

Subject: Resolution 2006-036, allocation of General Fund cost to other funds, grants and projects

In FY98, the borough adopted Resolution 98-037, which assigned the interest earnings of certain funds and service areas to the general fund. This was required by the Governmental Accounting Standards Board (GASB) adoption of statement number 31, which required that interest earned by an internal investment pool (which the borough has) be allocated and recorded in all funds owning interest in the pool.

The borough historically retained and reported in the general fund interest earned by certain other funds and service areas. In most cases, the retained interest was considered to be compensation for intergovernmental services provided by the General Fund. In other cases, the other funds relied on transfers from the General Fund for all its revenue, and allocation of interest was simply an accounting exercise.

GASB 31 allowed for the assignment of interest, but required that local governments have a legal or contractual basis to do so. Resolution 98-037 was adopted which formalized the borough's policy of retaining interest as compensation for intergovernmental services provided by the General Fund.

As part of the Mayor's transition report, a recommendation was made by the transition team to charge service areas for services provided by the General Fund. Since this was already being done, the Finance Department conducted an assessment of the validity of the current practice of retaining interest income as compensation for intergovernmental services.

The services provided include, but are not limited to, processing of payroll, purchasing, accounts payable, cash receipts, cash disbursements, cash management, real and personal property valuation, tax billing and collection, miscellaneous billing and collection, legal services, and computer support services. The estimated cost-based value of the services was compared with the projected interest earnings of each fund or service area, assuming full allocation of interest. In total and on average, the value of the intergovernmental services provided by the general fund approximates, or exceeds, the potential interest earned by the funds and service areas.

One issue that was noted was the inequity of the plan for those funds that had larger equity accounts versus those funds that had small equity balances. Those service areas with large equity balances effectively paid more than those service areas with small(er) equity balances.

To make the plan more equitable, the Finance Department has developed a plan for allocating cost using an indirect rate. This plan would allocate to service areas, funds, and grants a charge for the intergovernmental services that are provided to them based upon their expenditure level, while at the same time allowing the service areas to keep the interest earnings that their equity in the central investment pool would generate.

Additionally, the Finance Department recently completed an analysis to estimate administrative costs incurred by the borough on behalf of the school district. It concluded that the best approach would be to charge a flat amount of $240,000 each year.

Implicit in the full allocation of interest income is the allocation of intergovernmental service charges. Generally accepted accounting principles (GAAP) also recommend allocation of income and costs in order to support accounting for governmental activities on a more detailed gross basis.