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A. Compensated AbsencesPark & Recreation The compensated absence payable amount reported on the balance sheet of all CITY OF local governments is an accrual of unused vacation, sick and comp time that CHMNSEN MEMORANDUM Fax: 952.227.1110 TO Mayor and City Council 7700 Market Boulevard compensated absences on the statement of net assets. The city does not record PO Box 147 this as a liability in the general fund as it is considered a long term liability. Chanhassen, MN 55317 FROM: Greg Sticha, Finance Director ((� Administration DATE: September 26 2011 Phone: 952.227.1100 payables including compensated absences. Fax: 952.227.1110 SUBJ: Compensated Absences Building Inspections As of December 31, 2010, the city's compensated absence payable balance was Phone: 952.2271180 BACKGROUND Fax: 952.227.1190 www.ci.chanhassen.mn.us Over the past couple of years, questions have been raised about the city's liability Engineering Phone: 952.227.1160 for compensated absences and whether reserves must be available to cover this Fax: 952.227.1170 liability. This memo is intended to answer questions about compensated absences. Finance Phone: 952.227.1140 What is Compensated Absences? Fax: 952.227.1110 Park & Recreation The compensated absence payable amount reported on the balance sheet of all Phone: 952.227.1120 local governments is an accrual of unused vacation, sick and comp time that Fax: 952.227.1110 would be due to an employee upon leaving employment. In accordance with Fax: 952.227.1110 Government Accounting Standards No. 16, the city records a liability for Recreation Center compensated absences on the statement of net assets. The city does not record 2310 Coulter Boulevard this as a liability in the general fund as it is considered a long term liability. Phone: 952.227.1400 reserves in the general fund, of which $1.5 million is undesignated. Based on Fax: 952.227.1404 Does the city have an unfunded liability for compensated absences? Planning & Natural Resources The answer is no. When looking at the city's governmental funds balance sheet Phone: 952.227.1130 on a full accrual basis (Statement No. 1 /as the private sector reports), the city has Fax: 952.227.1110 assets that exceed its liabilities by $94 million. When looking at the city's general fund balance sheet on a modified accrual basis (Statement No. 3/based on how Public works governments account for balance sheet items), the city has almost $5.3 million in 7901 Park Place Phone: 952.227.1300 reserves in the general fund, of which $1.5 million is undesignated. Based on Fax: 952.227.1310 either accounting method, the city has assets in excess of its liabilities to fund all payables including compensated absences. Senior Center Phone: 952.227.1125 As of December 31, 2010, the city's compensated absence payable balance was Fax: 952.227.1110 $948,046. Of that, $117,783 is payable from the city's utility funds. Web Site www.ci.chanhassen.mn.us Chanhassen is a Community for Life - Providing for Today and Planning for Tomorrow Mayor & City Council September 26, 2011 Page 2 Does the compensated absence payable have an impact on the 2012 budget? The city's budget is prepared on a cash basis. The compensated absence payable reported on the CAFR is based on an accrual or modified accrual basis. The compensated absence payable balance reported on the CAFR has no impact on the 2012 budget. What is the City's policy on funding a reserve for compensated absences? Like most other communities, the city follows a "pay as you go" policy regarding compensated absences. Since the probability of the payable becoming substantially due in any one year is remote, the city has decided not to have a reserve set aside to fund this payable. Most cities do not fund a reserve for this payable, and the ones that do typically fund a relatively small portion of the total payable. There are also no federal, state or government accounting standards that require state or local governments to reserve funds for this payable. As noted earlier, the city's assets exceed its liabilities and would cover all payables if the need ever arises. How does the City fund payout of sick, vacation and comp time when someone leaves employment? When an employee leaves the city, the amount of sick, vacation and comp time paid out depends on several things, including length of service and the reason for termination (as outlined in the personnel policy). Typically it takes 6 -8 weeks to replace an employee; and in most cases, the new hire is paid a lower salary than the outgoing employee. Historically, this combination has offset the severance costs of the outgoing employee. Therefore, it has not been the city's practice to budget for potential severance pay, nor does the city have a required reserve policy for compensated absences. ATTACHMENTS 1. KFS compensated absences amounts. f\gregs \budget\2012 budget \9 -26 compensated absences.docx City of Chanhassen Compensated Absence Payable Comparison City Compenstaed Absence Payable Bal at 12 -31 -10 Type of leave accrual plan Shoreview $ 338,301 PTO plan Champlin 426,570 Sick & Vacation Farmington 572,546 New hires on PTO, others sick & vacation Lino Lakes 666,225 Sick & Vacation Andover 704,441 Employees choose between sick & vacation plan and PTO plan Oakdale 916,565 Sick & Vacation Chaska 935,824 New employees a PTO program, old employees had choice Chanhassen 948,046 Sick & Vacation Prior Lake 1,065,143 Sick & Vacation Savage 1,263,069 Sick & Vacation Inver Grove Heights 1,733,731 PTO for regular employees, police have sick & vacation Average 870,042