5.1. SR 11-08-2010Item # 5_1.
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TO: Mayor and City Council
MEMORANDUM
FROM: Tim Simon, Finance Director
DATE: November 8, 2010
SUBJECT: GASB 54 Accounting Changes
Fund balance refers to the difference between assets and liabilities in the governmental fund
balance sheet. This information is one of the most widely used elements of local
government financial statements.
The Governmental Accounting Standards Board (GASB) has found that the existing
standards guiding fund balance reporting has frequently led to misunderstandings and
inconsistent reporting of fund balance information among governments in practice.
Consequently, financial statement users were unable to readily interpret reported fund
balance information to identify available resources and assess liquidity and financial
flexibility. The GASB issued Statement No. 54, Fund Balance Keporting and Governmental Fund
Type Definitions, to address issues related to how fund balance was being reported.
This Statement is designed to improve financial reporting by establishing fund balance
classifications that are easier to understand and apply. Fund balance will be displayed in the
following classifications depicting the relative strength of the spending constraints that
control how specific amounts can be spent:
Nonspendable fund balance -amounts that are not in a spendable form (such as
inventory) or are required to be maintained intact (such as the principal of an
endowment fund).
• Restricted fund balance -amounts that can be spent only for the specific purposes by
their providers (such as grantors, bondholders, and higher levels of government),
through constitutional provisions, or by enabling legislation.
• Committed fund balance -amounts that can be used only for the specific purposes
determined by a formal action of the government's highest level of decision-making
authority. Commitments may be changed or removed only by the government taking
the same formal action that imposed the constraint originally.
• Assigned fund balance -amounts intended to be used by the government for specific
purposes; intent can be expressed by the governing body or by an official or body to
which to governing body delegates the authority. This indicates that resources in other
governmental funds are, at a minimum, intended to be used for the purpose of that
fund.
• Unassigned fund balance -amounts that are available for any purpose. Positive
unassigned amounts will be reported only in the general fund. If another governmental
fund has a fund balance deficit, then it will be reported as a negative amount in the
unassigned classification in that fund.
NEW FUND BALANCE CLASSIFICATIONS
Class if cations
Essentially
what is now
RESERVID
Essentially
what is now
UNRESERVED
- DESIGNATID
- tJNDESIG3VATID
NONSPENDABLE
RESTRICTID
COMMITTID
ASSIGNID
UNA SSIGNID
Statement 54 also clarifies certain terms used in the definitions of governmental fund types
that have led to confusion. It makes clear that, for financial reporting purposes, a special
revenue fund may only be created to report a revenue source (or sources) that are restricted
or committed to a specified purpose, and that the revenue source should constitute a
substantial portion of the resources reported in the fund.
The basic definition of the debt service fund type remains essentially unchanged. However,
the definition of the capital project fund type has been broadened to encompass capital
outlays in general, not just the acquisition or construction of major capital facilities.
Governments are required to implement Statement 54 for fiscal years first ending June 30,
2011, which would be December 31, 2011 for the City of Elk River, and early
implementation is encouraged.
The Finance Department has decided to early implement Statement 54 for the fiscal year
ending December 31, 2010. In preparation for this, all the funds and fiznd classifications
have been reviewed and reclassifications will be made to comply with the new fund type
definitions (see the following chart for special revenue fund reclassifications). Also, Council
will need to approve an updated general fund balance policy and the commitment of specific
revenue sources in the special revenue funds.
SPECIAL REVENUE FUND RECLASSIFICATIONS
Current Special Revenue Funds New Fund Type Classification
Lbrary Special Revenue
Ice Arena Special Revenue
Pinewood Golf Course Special Revenue
Senior Citizen Account Special Revenue
Park Dedication Fund Capital Project
Landfill Enterprise -Garbage
Landfill Const Debris Enterprise -Garbage
Micro Loan Fund Special Revenue
DEED Loan Fund Special Revenue
Development Fund Special Revenue
Capital Outlay Reserve Capital Project
Insurance Reserve Special Revenue
Government Buildings Reserve Capital Project
Drug Forfeiture Special Revenue
Severance Pay Reserve General Fund
GRE Reserve Capital Project
YMCA Grant Special Revenue
* General fund and all other debt service, capital projects and enterprise
fiords remain unchanged.
Attachments•
• Draft fund balance policy
• Draft resolution committing specific revenue sources in special revenue funds
• Sample reclassification with 2009 numbers
Fund Balance Policy
Purpose:
It is important to establish sound financial management policies to ensure financial
stability of the City of Elk River for the benefit of residents and businesses. Fund
balance reserves are an important component in ensuring the overall financial health of a
community, by giving the City sufficient funds to meet contingency and cash-flow timing
needs. In establishing an appropriate fund balance, the City needs to consider the
demands of cash flow, need for emergency reserves, ability to manage fluctuations of
major revenue sources, credit rating and long-term fiscal health.
Policy:
• The City will maintain an unassigned General fund balance of not less than 40%
of budgeted operating expenditures; however, this need could fluctuate with each
year's budget objectives.
• Annual proposed General fund budgets shall include this benchmark policy.
Council shall review the amounts in fund balance in conjunction with the annual
budget approval, and make adjustments as necessary to meet expected cash-flow
needs.
• In the event the unassigned General fund balance will be calculated to be less than
the minimum requirement at the completion of any fiscal year, the City shall plan
to adjust budget resources in the subsequent fiscal years to bring the fund balance
into compliance with this policy.
• The City Council may consider appropriating (for authorized purposes) year-end
fund balance in excess of the policy level or increasing the minimum fund
balance. An example of preferred use of excess fund balance would be for one-
time expenditures, such as capital expenditures, which do not result in recurring
operating costs.
• Appropriation fiom the minimum fund balance shall require the approval of the
City Council and shall be used only for non-recurring expenditures, unforeseen
emergencies or immediate capital needs that cannot be accommodated through
current year savings. Replenishment recommendations will accompany the
decision to utilize fund balance.
• At the discretion of the City Council, fund balance maybe committed for specific
purposes by resolution designating the specific use of fund balance and the
amount. The resolution would need to be approved no later than the close of the
reporting period and will remain binding unless removed in the same manner.
• The City Council authorizes the Finance Director and/or City Administrator to
assign fund balance that reflects the City's intended use of those funds.
When both restricted and unrestricted resources are available for use, it is the
City's policy to first use restricted resources, and then use unrestricted resources
as they are needed. When committed, assigned or unassigned resources are
available for use, it is the City's policy to use resources in the following order; 1)
committed 2) assigned and 3) unassigned.
Definitions:
Fund balance -the difference between assets and liabilities reported in a governmental
fund.
Nonspendable fund balance -amounts that are not in a spendable form or are required
to be maintained intact.
Restricted fund balance -amounts subject to externally enforceable legal restrictions.
Unrestricted fund balance -the total of committed fund balance, assigned fund balance,
and unassigned fund balance.
Committed fund balance -amounts that can be used only for the specific
purposes determined by a formal action of the government's highest level of
decision-making authority. Commitments may be changed or lifted only by the
government taking the same formal action that imposed the constraint originally.
Assigned fund balance - amounts a government intends to use for a specific
purpose; intent can be expressed by the government body or by an official or body
to which the governing body delegates the authority.
Unassigned fund balance -residual amounts that are available for any purpose
in the general fund.
RESOLUTION COMMITTING SPECIFIC REVENUE SOURCES
IN SPECIAL REVENUE FUNDS
Whereas, the Governmental Accounting Standards Board's Statement #54 definition of
special revenue funds states that special revenue funds are 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 transfers 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 by the City Council of the City of Elk River that effective
November 15, 2010 the specific revenue source of each special revenue fund and the specific
purposes for which they are committed are as follows:
SpecialReveuue fund Specific ~Zev~;nue Sources Committed For
Library i ax levy Library maintenance and improvements
Ice arena Charges for services Ice arena operations, maintenance and
improvements
Pinewood go}fcourse Charges for services Golf course operations, maintenance and
improvements
Senior citizens Activity tees, donations Senior citizen activities and programs
Micro loan Loan payments Financing for economic development
projects
Development Fund Tax levy, development fees Committed to promote economic
development activities
Insurance reserve Insurance dividend Insurance deductibles, litigation costs
and safe ro am
GASB 54 - 2009 Fund Balance Classifications
Nonspendable:
Prepaid items
Restricted for:
Economic development
Law enforcement
YMCA debt service
Committed to:
Library
Ice arena
Golf course
Senior citizen programs
Economic development
Insurance deduct/litigation
OPEB obligation
Assigned to:
2010 budget
Severance pay
Unassigned
Total fund balances
Cash flow
•
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DEED v~~u.a
Development
Insurance
Forfeiture
YMCA -
General Pinewood
Golf Citize~is
Sr Loan Loan Fund Reserve Fund Grant EDA
Fund Library Ice Arena .
$ - $ _ $ _ $ - $ 131,242 $ - $ $
$ - $ - $ - -
$
- - 1,167,563
- 662,494 - -
_ - - - - 1,575,885
- 409,323 - - _ - - -
_ 39,417 - - - _ - - -
_ _ 9,817 - _ -
- _
- - 902,266 - 445,545 -
- - - - 422,172 - -
88,718 - - -
325,000 - - _ _ _ - - - -
52,306 - -
5,374,575 - - -
817
9 266
$ 902 $ 662,494 $ 445,545 $ 553,414 $ - $ 1,575,885 $ 1,167,563
$ 5,840,599 $ 409,323 $ 39,417 $ - ,
$ ,
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FUND BALANCE REPORTING AND
GOVERNMENTAL FUND TYPE
DEFINITIONS
GASB 54 Fund Balance Reporting
• Better consistency in easier to understand
and apply fund balance classifications
• Provides clearer hierarchy of fund balance
classifications based on constraints
• Clarifies governmental fund types
• Applies only to governmental funds
• Required implementation for fiscal years first ending
June 30, 2011 and early implementation is encouraged.
GASB 54 Fund Balance Reporting
• Current fund balance classifications:
Reserved (legally restricted or unavailable for spending)
Unreserved:
- Designated
- Undesignated
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11/08/2010
GASB 54 Fund Balance Reporting
• New fund balance classifications:
- Nonspendable - (ex. prepaid items, irrventory)
- Restricted - (ex. debt service, park dedication fees)
- Committed - (ex. library, economic development)
- Assigned - (ex. 2010 budget)
- Unassigned - (ex. cash flow)
J
GASB 54 Fund Balance Reporting
• Current standard vs. new standard
Nonspendable
Reserved Restricted
Committed
Unreserved
- Designated ~ Assigned
- Undesignated Unassigned
GASB 54 Governmental Fund Type Definitions
• Special Revenue Fund Analysis:
o Are the fund's expenditures capital in nature?
a Is there at least one restricted or committed revenue source?
(Interest and transfers are excluded from a revenue source)
o Is the revenue source substantial and expected to continue?
e If the resources no longer qualify as a special revenue fund:
• ltvo options -
a General fund
> Mother fund with a similar purpose
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GASB 54 Governmental Fund Type Definitions
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GASB 54 Fund Balance Policy
• Requirements of a Fund Balance Policy:
- Appropriate level of unassigned fund balance to be
maintained
- Circumstances which unassigned fund balance can be
"spent down"
- Policy/procedure for replenishing deficiencies
- Define steps required for committing funds
- Define person(s) with authority to express intended uses
that result in assigned funds.
- Establish the order of expenditure of funds by
classification as they become available
GASB 54 - 2009 Fund Balance Classifications
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GASB 54
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• Next Steps -
~ Adopt fund balance policy
~ Adopt resolution to commit special revenue funds
~ Transfer/reclassification offunds