Interfund Loan Policy
a. City Council approval by resolution is required for any interfund loan. All interfund loans must be documented by formal agreements that specify the terms and conditions.
b. All interfund loans are interest bearing and the amount of interest to be paid on the loan must be at least equal to the investment earnings the fund making the loan would have received had the loan not occurred.
c. The term of an interfund loan is established by the City Council and typically should not exceed five years.
d. The interfund loan is callable by the lending fund if needed to ensure that the lending fund has sufficient operating funds.
e. All interfund loan proposals require a feasibility analysis demonstrating that:
• The borrowing fund has the capacity to repay the debt;
• The lending fund has the capacity to lend the funds, beyond its own operating and capital needs; and
• The loan does not violate any debt covenants or other provisions of the borrowing and lending funds.
f. As part of the due diligence, each interfund loan proposal must demonstrate that the loan can be repaid. It is important to avoid masking an operating deficiency in one fund with an interfund loan from another fund. This is the centerpiece of the policy, which seeks to avoid loans that fail the fundamental test of performance (repayment) under the contract.
• If a feasibility analysis does not show that the loan can be safely repaid, the appropriate recommendation may be a revenue enhancement or another correction of the underlying reason for the funding deficiency. An alternative financing recommendation may be a fund balance donation.
f. There is no prepayment penalty on an interfund loan. Interest is to be paid quarterly, and principle payments are subject to the feasibility analysis cash projections.
g. The interest expense paid on interfund loans is to be treated as user fund expense, while the interest income is to be treated as interest revenue to the loaning fund.