DEPARTMENT: Finance
FILE TYPE: Regular Action
TITLE
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Authorization To Amend The 2026 Budget And Execute A Transfer Of Up To $11,893,586 From The Employee Services Reserve Fund To The General Fund
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RESOLUTION
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WHEREAS, the Employee Services Reserve Fund is an internal service fund of Dakota County established to record and fund the liabilities associated with compensated absences and other post-employment benefits (OPEB); and
WHEREAS, as of September 21, 2026 the Employee Services Reserve Fund held cash of $47,332,556 and an unrestricted net position of $6,528,584; and
WHEREAS, the General Fund incurred $5,365,002 of compensated absences costs during 2023 through 2025 for which no corresponding charge was made to, or reimbursement received from, the Employee Services Reserve Fund; and
WHEREAS, the sum of the unrestricted net position of the Employee Services Reserve Fund of $6,528,584 and the unreimbursed General Fund compensated absences costs of $5,365,002 is $11,893,586; and
WHEREAS, Dakota County does not maintain an irrevocable trust for other post-employment benefits, and the assets of the Employee Services Reserve Fund are therefore not reported as plan fiduciary net position and do not reduce the total OPEB liability presented in the County’s government-wide financial statements; and
WHEREAS, the unassigned fund balance of the General Fund is projected to be approximately $6,021,096 at the end of fiscal year 2026, which as a percentage of projected General Fund expenditures of $339,735,383 is 1.8 percent; and
WHEREAS, on August 12, 2026, S&P Global Ratings placed the County’s long-term rating on CreditWatch with negative implications, citing deterioration in General Fund unassigned fund balance; and
WHEREAS, the Dakota County Board of Commissioners adopted an updated version of County Policy 2003 - Fund Balance and Unrestricted Net Position on June 23, 2026, which outlined the obligation of the Board and management to adopt plans to replenish General Fund unassigned fund balance; and
WHEREAS, County Policy 2002 - Budget Compliance requires that amendments to the budget which impact fund balance are approved by the Dakota County Board of Commissioners; and
WHEREAS, Dakota County adopts a budget for its General Fund, special revenue funds, and enterprise funds, but not its internal service funds; and
WHEREAS, Minnesota Statutes, section 375.18, subdivision 7, authorizes the County Board by majority vote to transfer any surplus beyond the needs of the current year in any county fund to any other county fund; and
WHEREAS, the proposed transfer is a one-time measure that does not restore General Fund unassigned fund balance to the minimum established by County Policy 2003 and does not substitute for the structural changes presented in the County Manager’s Recommended 2027 Budget.
NOW, THEREFORE, BE IT RESOLVED, That the Dakota County Board of Commissioners hereby authorizes a transfer of up to $11,893,586 from the Employee Services Reserve Fund to the General Fund and amends the 2026 General Fund Budget as follows:
Other Financing Sources
Transfer In $11,893,586
Total Other Financing Sources $11,893,586
Budgeted Fund Balance
Increase In Unassigned Fund Balance $11,893,586
BE IT FURTHER RESOLVED, That the Finance Director is authorized to determine the final amount of the transfer based on 2026 year-end actual balances, provided that the Employee Services Reserve Fund retains cash sufficient to meet the compensated absences and OPEB obligations coming due in 2027, and to execute the transfer and record the related budget adjustments; and
BE IT FURTHER RESOLVED, That the Finance Director shall report to the Board of Commissioners, with the 2026 year-end financial report, the final amount of the transfer and its allocation between the reimbursement of prior-period General Fund compensated absences costs and the transfer of surplus net position.
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BACKGROUND
On August 12, 2026, S&P Global Ratings (S&P) placed Dakota County’s long-term rating on CreditWatch with negative implications, citing a deterioration in General Fund unassigned fund balance. The Board has been regularly updated on this issue over the past year, and staff have proposed long-term structural solutions as part of the County Manager’s Recommended 2027 Budget.
After meeting with analysts from S&P on August 19, 2026, staff from Dakota County’s Finance Department met with consultants from the County’s municipal advisor, Ehlers. Staff and Ehlers reviewed the County’s finances to identify potential sources of one-time funding to improve General Fund unassigned fund balance as of the end of 2026. The Employee Services Reserve Fund, an internal service fund established to record and fund compensated absences and other post-employment benefit (OPEB) obligations, was identified as the most significant available source.
The proposed amount of $11,893,586 has two distinct components. The first is $6,528,584, the unrestricted net position of the Employee Services Reserve Fund as of September 21, 2026 - the amount by which the fund’s assets exceed both its current and long-term compensated absences and OPEB liabilities. The second is $5,365,002 of compensated absences costs incurred by the General Fund during 2023 through 2025 for which the General Fund was never reimbursed by the Employee Services Reserve Fund. The second component is properly characterized as a reimbursement of costs the General Fund has already borne rather than as a transfer of surplus.
Dakota County is pay-as-you-go for both compensated absences and OPEB, meaning the County does not pre-fund these obligations and budgets for them in the year benefits are paid. GASB Statement No. 101, Compensated Absences, and GASB Statement No. 75, Accounting and Financial Reporting for Postemployment Benefits Other Than Pensions, require governments to report these long-term liabilities in their government-wide financial statements. Neither standard requires a government to hold cash reserves equal to the outstanding liability. Because the County does not maintain an irrevocable trust for OPEB, the assets held in the Employee Services Reserve Fund are not reported as plan fiduciary net position and do not reduce the total OPEB liability presented in the County’s government-wide financial statements. The cash held in the fund therefore provides no government-wide balance sheet benefit and remains available for the Board to direct, subject to the fund’s ability to meet obligations as they come due.
Given the current and projected financial position of the General Fund, it is the recommendation of staff to use the flexibility available in the Employee Services Reserve Fund on a one-time basis to improve the General Fund’s fund balance position at the end of the year. Staff note that the transfer does not resolve the structural imbalance in the General Fund. Even after the transfer, projected unassigned fund balance of 5.3 percent of expenditures remains substantially below the minimum established by County Policy 2003, and rating agencies generally assign limited weight to non-recurring measures. The structural response is presented in the County Manager’s Recommended 2027 Budget.
RECOMMENDATION
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Staff recommend amending the 2026 Budget and authorizing the execution of a transfer of up to $11,893,586 from the Employee Services Reserve Fund to the General Fund.
The transfer applies available one-time resources to improve the General Fund’s projected year-end 2026 unassigned fund balance from approximately 1.8 percent to 5.3 percent of expenditures without reducing services or increasing the levy, and without impairing the County’s ability to pay compensated absences and OPEB obligations as they come due. Staff note that the transfer is non-recurring, does not restore unassigned fund balance to the minimum established by County Policy 2003, and does not substitute for the structural changes presented in the County Manager’s Recommended 2027 Budget.
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FINANCIAL AND STAFFING IMPACTS
Executing the transfer will increase General Fund unassigned fund balance by up to $11,893,586, which is currently estimated to increase the projected General Fund unassigned fund balance as a percentage of expenditures from 1.8 percent to 5.3 percent at the end of 2026. Projected 2026 General Fund expenditures are $339,735,383.
The transfer will reduce the unrestricted net position of the Employee Services Reserve Fund by $11,893,586, from $6,528,584 to approximately $(5,365,002). Because the County does not pre-fund compensated absences or OPEB and does not maintain an irrevocable OPEB trust, the reduction in the fund’s unrestricted net position does not change the compensated absences or total OPEB liabilities reported in the County’s government-wide financial statements. Internal service fund balances are consolidated into governmental activities, so the transfer has no effect on government-wide net position.
PREVIOUS BOARD ACTION
None.
ATTACHMENTS
None.
CONTACT
Department Director: Will Wallo
Author: Will Wallo