HomeMy WebLinkAbout[08a] Fund Balance Policy Revision •
CITY OF ST.Jt)SFI'II . Council Agenda Item 8(a)
MEETING DATE: December 1, 2011
AGENDA ITEM: Fund Balance Policy
SUBMITTED BY: Finance
BOARD /COMMISSION /COMMITTEE RECOMMENDATION: None
PREVIOUS COUNCIL ACTION: Council adopted the fund balance policy on March 5, 2009 prior to the
creation of GASB 54. The 2009 policy was consistent with accounting principles for GASB 34 reporting.
BACKGROUND INFORMATION: The Government Accounting Standards Board (GASB) implemented
Statement 54 revising the fund balance classifications of governmental funds. In addition, Statement 54
clarifies the definitions of the governmental funds. GASB created Statement 54 to reduce the
differences in fund balance reporting between entities and to more clearly indicate how resources may
be spent. Fund balance will now be classified into one of five categories: Nonspendable, Restricted,
Committed, Assigned and Unassigned. The policy describes each of the categories. The footnotes in the
financial statement will also be updated to meet the new Statement.
The most significant fund definition revision is the classification of a special revenue fund. The special
revenue fund is defined to account for the proceeds of specific revenue sources that are legally
restricted to the expenditure for specified purposes other than debt service and capital projects. The
revenues must comprise a substantial portion of the fund's inflows.
The City of St. Joseph is required to implement GASB 54 for the year -ended December 31, 2011.
GASB 54, and the proposed fund balance policy revision, requires Council to adopt a resolution to
formally commit specific revenue sources for the governmental funds. Council decision to commit fund
balance must be completed before December 31 each year. The amount of the fund balance
commitment will be determined when the financial statements are closed.
BUDGET /FISCAL IMPACT: No Direct Impact
ATTACHMENTS: Request for Council Action 8(a):1 -2
Draft Revised Fund Balance Policy 8(a):3 -9
Resolution 2011 -024 Committing Revenues 8(a):10
REQUESTED COUNCIL ACTION: Adopt the revised fund balance policy and authorize execution of
Resolution 2011 -024 committing specific revenue sources.
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FUND BALANCE
Purpose
The purpose of this policy is to establish the specific guidelines for the level of unreserved and reserved
fund balances available for current and future spending fund balances in the governmental funds. The
policy also specifics the types of futu-Fe expel:441ms to be designated, how the amounts for such
- - • - - • - - , - • • - . •_ • - •- - . The fund balance policy addresses a
minimum level of unrestricted fund balance to be maintained, how the unrestricted fund balance can be
used or spent down and how that fund balance will be replenished if it falls below the minimum level.
In addition, the City sets a stabilization amount for use in emergency situations or when revenue
shortages or budgetary imbalances arise. The policy also addresses when fund balances will be
restricted to specific purposes.
Background
Government Accounting Standards Board (GASB) Statement No. 54 was enacted to enhance the
usefulness of fund balance information by providing clearer fund balance classifications that can be
more consistently applied and by clarifying the existing governmental fund type definitions. In
governmental funds, a City should identify fund balance separately between non - spendable, restricted,
committed, assigned or unassigned based on the relative strength of the constraints that control how
specific amounts can be spent - - _ . _ _ - - - _ ... .. The City may assign and report
_ - - - - : _ . - : ' • • - (GAAP) as established by the Governmental Accounting
Standards Board (GASB). Future changes -to GAAP FRay req.u+Fe changes to this policy.
Proprietary funds' equity will be managed as a separate business -like enterprise as allowed by U.S.
Generally Accepted Accounting Principles GAAP. The funds will monitored through operations and their
rate structures. Examples of Proprietary funds include water, sewer, refuse and storm water.
Proprietary fund balances will be classified as either invested in capital assets net related debt,
restricted or unrestricted.
Governmental Fund Balance Classifications
In accordance with GAAP, the City will classify the fund balance in the following five categories:
1. Nonspendable Fund Balance
a. Items not expected to be converted to cash such as prepaid items and inventory.
b. Amounts that are legally or contractually required to be maintained intact such as
endowments or permanent funds.
c. Amounts are not available for future spending.
i. Examples may include:
1. Prepaid items
2. Inventory
3. Long -term receivables (except if offset by deferred revenue)
4. Land held for resale
2. Restricted Fund Balance
a. Amounts subject to externally enforceable legal restrictions as established by creditors,
grantors or contributors, or constraints imposed by state statutes.
b. The constraint is for a specific purpose and legally enforceable.
c. Examples may include:
i. Unspent bond or grant proceeds
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ii. Tax increments
iii. Park dedication fees
iv. Cable PEG Access fees
v. Accumulated funds in debt service funds
3. Committed Fund Balance
a. Amounts constrained for a specific purpose by City Council resolution.
b. Constraint is self- imposed (not externally constrained).
c. Only the City Council can change the constraint by a majority vote.
d. The decision to commit fund balance must be made annually or as deemed necessary.
e. To remove the constraint on the specified use of committed resources the City Council
shall pass a resolution.
f. Examples may include:
i. Contractual commitments that will be satisfied with existing fund balance.
ii. Amounts transferred to a Capital Project fund for a specific purpose.
iii. Internal "Savings /Reserves" for a specific purpose such as a fire pumper truck.
4. Assigned Fund Balance
a. For all funds other than the General fund, any remaining positive balances not already
classified as nonspendable, restricted or committed.
b. Constraint is self- imposed (not externally constrained).
c. Assigned fund balances demonstrate the City's intended use.
d. The City Council delegates the authority to assign and remove assignments of fund
balance amounts for specified purpose to the Finance Director.
e. Constraints must have a specific purpose.
f. No constraints will be assigned resulting in a residual deficit in the fund.
g. Examples may include:
i. Appropriation of existing fund balance (amounts used to balance the
subsequent year's budget).
ii. Budget carry-overs for specific items such as election funding, facility studies,
capital improvement funding.
5. Unassigned Fund Balance
a. For the General fund, amounts not classified in any other category.
b. For all other governmental funds, amounts of a residual deficit in the funds.
c. The General fund is the only fund that can report a positive unassigned fund balance.
d. Amounts are available for any purpose.
e. Stabilization Arrangements — amounts set aside for economic, revenue and budget.
1. Working capital in the General fund shall be maintained at a level of 4 to
6 months of the next year's budgeted expenditures in the general fund
(excluding the fire department).
2. Budgeted reserves not assigned a specific purpose such as a budgeted
reserve for possible future LGA unallotments.
Fund Balance Flow Assumptions
The City intends to spend resources from fund balances in the following order as resources are available:
• Restricted
• Committed
• Assigned
• Unassigned
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Governmental Fund Definitions
GASB Statement 54 provides clarification of the governmental funds definitions. The definitions are
added to the fund balance policy to dearly define their reporting requirements. It is also important to
understand the fund classification when determining the classification of their fund balances.
1. General Fund — Used to account for all financial resources not accounted for in another fund.
2. Special Revenue Funds — Used to account for the proceeds of specific revenue sources that are
restricted or committed to expenditures for specific purposes (other than debt service or capital
projects).
a. One or more specified restricted or committed revenues are foundation for the fund
(comprise a substantial portion of fund's inflows).
b. Other inflows (i.e. interest and transfers) may be reported in fund, if restricted,
committed or assigned to the specified purpose of the fund.
c. Restricted or committed proceeds of specific revenue sources should be expected to
continue to comprise substantial portion of inflows of the fund.
d. Exception for specific revenue rules — General fund of Blended Component Unit (EDA).
3. Debt Service Funds — Used to account for and report financial resources that are restricted,
committed, or assigned to expenditure for principal and interest payments.
4. Capital Projects Funds — Used to account for and report financial resources that are restricted,
committed, or assigned to expenditures for capital outlays, including the acquisition or
construction of capital facilities and other capital assets. Capital project funds exclude those
types of capital related outflows financed by proprietary funds or for assets that will be held in
trust for individuals, private organizations, or other governments.
for expenditure Of is -legate scgrega#ed far specific future-uses, se that he brnrescrvcd fund balance can
f„u t
not available for spending in thc subsequent year's budget.
portion of thc fendbala ec-i6 -ant eve-liable for new spending because of legal restrictions
commonly used to repeft legal Fcst- r4ctions arising from state statutes or grant requirements
placed on thc use of specific resources.
depending on the needs of the City each year.
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the audit is completed. The auditor shall offer an- epinion en-the adequacy of thc reserve balance.
balance may, in turn, be subdivided inte designated and endesignated.
utilization in a-future peried, such --as for geracral-eontiege ics of foal' equipment replacement.
distinguished from that -which is- Fesewcd. Dcsignatieris should be supported by actual plans
legally authorized or resultin-cxpendituFes. The designations arc thc City's self imposed
limitations on the use of available current financial resources.
sheet only in connection with- geveromental funds. Dcsignatieesare reported as part of
thc unreserved designated fund balance on thc balance sheet in thc fund financial
statements and disclosed in thc notes te-the financial statements by specific purpose.
statements.
current planning.
of current resources available for which there arc no City self imposed limitations or sct
spending plan. Although theFc is- gcncrallyne set spending plan for the undcsignated portion,
dedication fees, tax increfnent reverie, fire eentracts, sales tax revenue and specified grant
funds. If a fund balance exc-ceds the FOGiblifed designation level sct by City Council, these funds
arc not available for the general operations of thc City.
._ e o ..
property taxes (thc sigr4fieant revenue sources of thc general fund).
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will consider other revenue searees te-pay far the emergency such as insurance
reimbursements, bonding, grants or state /federal appropriations.
25% of the current y er expenditures.
Enterprise Fund Equity
Enterprise funds are used to account for operations financed and operated in a manner similar to
private business enterprises, where the City intends the cost of providing goods or services to the public
be financed or recovered primarily through user charges. The City's enterprise funds include the Refuse,
Water, Sewer and Storm Water funds.
It is the City's intent to cover all operating, including depreciation, and non - operating expenses through
user charges to eliminate the impact on taxpayers. User charges will be reviewed annually to ensure
adequate rates are charged for the services provided. A detailed rate analysis will be conducted bi-
annually.
Enterprise funds' equity will be classified in one of the following categories:
• Investment in Capital Assets, Net of Related Debt. The component of net assets which is the
difference between assets and liabilities of proprietary funds that consists of capital assets less
both accumulated depreciation and the outstanding balance of debt that is directly attributable
to the acquisition, construction or improvement of the capital assets.
• Restricted. The component of net assets which is the difference in assets and liabilities of
proprietary funds that consist of assets with constraints placed on their use by either external
parties (i.e. creditors or grantors) or through constitutional provisions or enabling legislation.
• Unrestricted. The difference between the assets and liabilities of proprietary funds that is not
reported as Investment in Capital Assets, Net of Related Debt or Restricted net assets.
The City Council will not establish a minimum required level for equity in proprietary funds other than
the funds should cover their own operating and non - operating costs. The City's goal is to cover 75% of
the depreciation in each enterprise fund by 2020 through slow incremental rate increases.
Other Policy Considerations
The City will use all budgetary and financial accounting options available to maintain the minimum level
of fund balance available for appropriation in the General and Special Revenue Funds. Some options
available include the following items:
1. A specific budgeted revenue increase (i.e. ad valorem property tax increase).
2. Increase fees for services.
3. Reduction of expenditures in the budget.
4. Transfers from other available funds.
5. Sale of capital assets.
It is the intent of the City to minimize significant fluctuations in ad valorem property tax rates. The City
is strongly dependent upon Minnesota state aids to subsidize the City's expenditure budget. State
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legislature may approve appropriation changes that would cause the City to adjust the property tax level
by a large amount to maintain an appropriate level of fund balance and to provide the services needed
by the community. The Administrator and Finance Director will monitor state legislation to be aware of
possible cuts or increases in State appropriations. The Administrator will report significant changes to
the City Council once realized. Further, the Council may reserve a portion of the budget for possible cuts
to State Aids.
The City Council requires positive fund balances for all governmental, proprietary and fiduciary funds,
with a few exceptions. The Council will allow a negative fund balance in the following instances:
1. A project may be in a developmental phase in which all appropriations have not yet
been received. It is anticipated the appropriations will be received within the fiscal year
or early the following fiscal year. The Finance Director will present anticipated revenue
sources to the Council when a deficit occurs for this reason.
2. An emergency occurred and all appropriations to pay for the emergency have not been
received yet. The Administrator will keep a current listing of anticipated revenue
sources to pay for the emergency.
3. Pledges for a project are expected to be received over a period of time. In this case, a
long -term receivable may be recorded if the pledges are assured to be received. If the
receipt of the pledges is not guaranteed, the receivable cannot be recorded. The
project (fund in some cases) will carry a negative balance until all pledges are received.
4. An inter -fund loan is not appropriate or not available to cover the fund deficit.
5. The quarterly report provided by the Finance Director is on the cash basis of accounting.
The cash basis of accounting does not account for receivables or payables in its
presentation, even though the accruals exist.
The Finance Director will report shortfalls or surpluses in the projected fund balance levels to the City
Council with the quarterly financial report, or as soon as found to be a significant impact, which ever is
sooner.
If a fund deficit occurs, a written plan by the appropriate designated Board (i.e. Fire Board) is required.
If a designated Board does not exist for the fund, the Finance Director will write a plan to move the fund
out of the deficit and review the plan with the Administrator. The City Council is responsible for
reviewing and approving the financial plan. The Administrator will monitor the plan's effectiveness on a
monthly basis. The Finance Director will report the plan's effectiveness to the Administrator and City
I Council on a quarterly basis. The fund balance must be restored to the targeted level within 24 months.
1 A fund surplus above all internal and external constraints - - - : - : - • : - • - - : - - = : - -
t eslaead -may also occur. In this case, the Administrator will notify the City Council to discuss the
circumstances of the surplus and determine whether or not the established threshold is effective.
Some appropriate plans for using fund surpluses include the following items (but is- are not limited to):
1. Move budgeted expenditure into a future year due to unforeseen circumstances.
2. Fund a one -time project or project planning that would not normally be budgeted in the
on -going operations of the City.
3. Return unused dollars to donors.
4. Transfer excess funds to another City fund to finance a project or cover a shortfall.
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The City's credit rating for debt financing and investing will also be considered in the level of required
General fund balance. The City Council may further restrict the required fund balance level to meet a
higher credit rating need if possible. The City's credit rating is reviewed annually by the Administrator,
Finance Director, and bond counsel when necessary. The City Administrator shall be responsible for
conducing rating reviews.
Reporting Requirements
Periodic required fund balance reports to elected officials provide necessary written communication
regarding the City's financial position. The Finance Director shall provide the City Council quarterly fund
balance reports on the cash basis of accounting.
The City's audit firm shall provide a Council presentation of the previous year's financial condition in the
modified and full accrual basis of accounting after the audit is completed. Any deficiencies presented by
the auditor's will be followed up by the Finance Director with a written plan to comply with this policy.
The audit presentation will occur before June 30 following the previous year's end.
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RESOLUTION 2011 -024
City of St. Joseph
Resolution Committing Specific Revenue Sources
In Special Revenue Funds
WHEREAS, the City of St. Joseph was incorporated as Minnesota municipality on January 17, 1890; and
WHEREAS, the City of St. Joseph follows U.S. generally accepted accounting principles (GAAP) for
financial reporting under the guidance of the Governmental Accounting Standards Board (GASB); and
WHEREAS, GASB issued Statement No. 54 Fund Balance Reporting and Governmental Fund Type
Definitions; and
WHEREAS, GASB Statement No. 54 defines a special revenue fund as a fund used to account for and
report the proceeds of specific revenue sources that are restricted or committed to expenditures for
specified purposes other than debt service or capital projects; and
WHEREAS, the term "proceeds of specific revenue sources" establishes that one or more specific
restricted or committed revenues should be the foundation for a special revenue fund and comprise a
substantial portion of the fund's revenues; and
WHEREAS, investment earnings and transfer from other funds do not meet the definition of a specific
revenue source; and
WHEREAS, Council action is required to formalize the commitment of the specific revenue sources to
specified purposes.
NOW, THEREFORE, BE IT RESOLVED, the St. Joseph City Council designates the specific revenue source
of each special revenue fund and the specific purposes for which they are restricted or committed are as
follows:
FUND SPECIFIC REVENUE SOURCES COMMITTED FOR
EDA Tax Levy Activities to promote economic development
FUND SPECIFIC REVENUE SOURCES RESTRICTED FOR
TIF 1 -4 St. Joseph Development Tax Increments Qualifying TIF expenditures listed in TIF Plan
TIF 2 -1 Millstream Shops & Lofts Tax Increments Qualifying TIF expenditures listed in TIF Plan
TIF 2 -2 St. Joseph Meat Market Tax Increments Qualifying TIF expenditures listed in TIF Plan
1120 Sales Tax Sales Tax Projects approved by voter referendum
Park Dedication Park Dedication Fees Park or trail development
Recreation Center Contributions Study to create a City recreation center
Charitable Gambling Contributions /Gambling Tax Winter /Summer recreation activities
Revolving Loan Community Development Block Activities to promote economic development
Grant /Loan Payments
Adopted this day of , 2011.
ATTEST: Rick Schultz, Mayor
Judy Weyrens, Administrator
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