5.7. SR 04-05-2010~/
Elk REQUEST FOR ACTION
River
To Item Number
Ma or and Ci Council 5.7.
Agenda Section Meeting Date Prepared by
Administration Aril 5, 2010 Tim Simon, Finance Director
Item Description Reviewed by
2009 Fund Balance Designations Lori ohnson, Ci Administrator
Reviewed by
Action Requested
Approval on the 2009 unreserved, designated fund balances in the General and Severance Pay Reserve
Funds.
Background/Discussion
Fund balance designations are presented to the City Council in accordance with the City's Financial
Management Plan. Section 9.2 of the Financial Management Plan regarding General Fund balance is
reprinted below for your reference.
9.2 The General Fund shall have an unreserved balance of not less than 40 percent of the next year's
budgeted expenditures. This calculation is made at the end of each fiscal year. If the year-end fund
balance exceeds this threshold, the City Council will consider the need to retain the excess and
increase the minimum fund balance before allocating the monies to other uses.
In previous years the City Council has set the unreserved, designated (fox working capital) fund balance at
41.5 percent of next year's General Fund budgeted expenditures and allocated the amount over that for
capital equipment, pay adjustments, or other one-time expenditures. In 2008, the fund balance was 41.1
percent of next year's budgeted expenditures which was a slight decrease as we received our first
unallotment for local government aid on December 26, 2008. The 2009 unreserved, designated fund
balance has increased to 47 percent of next year's budgeted expenditures. The main reason for the
increase is the anticipated reductions in 2010 revenues (LGA, MVHC), and using $325,000 of the fund
balance in the 2010 budget. Overall, with the significant reductions in the governtent aids the financial
condition has remained strong in the General Fund.
Rating agencies (Moody's & S&P) have consistently reviewed the fund balance level in the General Fund
as a financial condition of the City. As you can see in our most recent rating report, Standard and Poor's
references the fund balances of the City. Maintaining a fund balance for working capital is very important
to cash flow the City's General Fund between tax cycles Qune, Dec) and local government aid payments
Quly, Dec).
With the 2008 financial statements, the City had to implement Governmental Accounting Standards
Board (GASB) statement number 45. The statement related to the accounting and reporting for
postemployment benefits other than pensions (OPEB). The city has a very small OPEB liability since we
only have the implicit rate subsidy. In 2008, we reviewed the actuarial calculations and our total actuarial
accrued liability is $88,718. Going forward in the second year of the OPEB liability we need to adjust the
designation for the change in the balance, which is $2,901. Designating the fund balance in the Severance
Pay Reserve Fund will show the commitment to addressing the liability.
For the 2010 financial statements we will be looking to implement GASB No. 54 which will affect the
reporting of fund balances and the classification of some of the current Special Revenue Funds. We will
be reviewing this new standard in an upcoming worksession.
Financial Impact
The 2009 unreserved, designated for working capital fund balance will be 47 percent of next year's
budgeted expenditures for the General Fund. The Severance Pay Reserve Fund balance will be
designated in the amount of $91,619 for OPEB liability.
Attachments
• Statement of Position -Fund Balances fox Local Governments
Action Motion by Second by Vote
Follow Up
~~`"" "''~~~ STATE OF MINNESOTA
~~~~':~ i OFFICE OF THE STATE AUDITOR
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~'~"``•~'~- 525 PARK STREET (651) 296-2551 (Voice)
(651) 296-4755 (Fax)
REBECCA OTTO SAINT PAUL, MN 55103-2139 state.auditor(astate.mn.us (F..-mail)
STATE AUDITOR 1-800-627-3529 (Relay Service)
Statement of Position
Fund Balances for Local Governments
In governmental fundsl, a local government should identify fund balance separately
between reserved and unreserved fund balance. The local government may assign and
report some or all of the unreserved fund balance as designated and undesignated. This
statement of position is based on generally accepted accounting principles (GAAP) for
government as established by the Governmental Accounting Standards Board. Future
changes in GAAP may result in a change in the position of the Office of the State
Auditor.
Back;;round
Reserved Fund Balance
The function of reserved fund balance is to separate the portion of fund balance that is
not appropriable for expenditure or is legally segregated for specific future uses, so that
the unreserved fund balance can serve as a measure of current available financial
resources.
Under GAAP, the portion of fund balance that meets the following criteria should be
classified as reserved:
Resources not available for spending. Some of the assets reported in
governmental funds are not available for spending in the subsequent year's
budget. For example, along-term loan receivable, such as an advance to another
fund, is not available for current spending. Likewise, local governments that
report supplies, inventories, and prepaid items in governmental funds typically
would report a corresponding amount of reserved fund balance to indicate that
these amounts are not actually available for spending.
• Legal restrictions on spending. Fund balance also is reserved to indicate situations
where a portion of fund balance is not available for new spending because of legal
~ Governmental fund reporting focuses primarily on the sources, uses, and balances of current financial
resources and often has a budgetary orientation. The governmental fund category includes the general fund,
special revenue funds, capital projects funds, debt service funds, and permanent funds. (Codification of
Governmental Accounting and Financial Reporting Standards § 1300.102).
Reviewed: January 2008
Revised: NA 2007-1022
restrictions involving parties outside the financial reporting entity. One common
example is amounts reserved for encumbrances, which represent contracts for
goods or services with outside parties still outstanding at the end of the year.
Reservations also are commonly used to report legal restrictions arising from state
statutes or grant requirements placed on the use of specific resources.
Unreserved Fund Balance
The part of fund balance not identified as reserved is the unreserved fund balance. The
unreserved fund balance may, in turn, be subdivided into designated and undesignated
portions.
Designated Fund Balance
Whereas GAAP dictates the criteria for reserved fund balance, fund balance designations
represent management's intended use of resources. Fund balance designations may be
established to indicate management's tentative plans for financial resource utilization in a
future period, such as for general contingencies or for equipment replacement. Such
designations reflect tentative managerial plans or intent and should be clearly
distinguished from that which is reserved. Designations should be supported by actual
plans approved by either the governing body or an appropriate officer. Such plans or
intent are subject to change and may never be legally authorized or result in expenditures.
Expressed another way, designations are a government's self-imposed limitations on the
use of available current financial resources.
Unreserved fund balance is designated for a local government's intended use of current
available financial resources. The focus on current financial resources is unique to
governmental funds. Accordingly, designations are reported on the face of the balance
sheet only in connection with governmental funds. Designations should be reported as
part of the unreserved fund balance designated for ... , or disclosed parenthetically or in
the notes to the financial statements.2 GAAP does not allow for any equivalent equity
designation to be used for government-wide financial reporting or for proprietary fund
and fiduciary fund financial reporting.
Undesignated Fund Balance
The unreserved undesignated fund balance consists of current resources available for
which there are no government self-imposed limitations or set spending plan. Although
there is generally no set spending plan for the undesignated portion, there is a need to
maintain a certain funding level. Undesignated fund balance is commonly used for
emergency expenditures not previously considered. In addition, the resources classified
as undesignated can be used to cover expenditures for revenues not yet received.
z Codification of Governmental Accounting and Financial Reporting Standards § 1800.144.
Reviewed: January 2008 2
Revised: NA 2007-1022
The basic financial statements should provide information on the nature and purpose of
each major component of reserved fund balance and unreserved fund balance. The notes
to the financial statements should disclose this information when it is not discernible on
the face of the financial statements.
Recommendations
Adoption of Fund Balance Policy
The Office of the State Auditor recommends that each local government establish a
formal policy on the level of unreserved fund balance that should be maintained in the
general fund and special revenue funds. The policy should be set by the governing body
and should provide both a time frame and a specific plan for increasing or decreasing the
level of unreserved fund balance. If the fund balance does not match the policy, a plan
should be developed by the governing body that will allow for compliance with the
policy.
The Office of the State Auditor recommends each local government adopt a policy
specifying the types of future expenditures to be designated, how the amounts for such
designations are arrived at, and whether the governing body will set the designations
annually or will set up a designation process and appoint someone to make the
determination based on the guidelines established by the governing body.
The local government's revenue streams should be kept in mind when drafting such a
policy. For example, funds that rely heavily on property taxes must maintain sufficient
financial resources to provide adequate resources until the next tax revenue collection
cycle. Funds that rely on state appropriations and grants should consider the timing of
those payments. Also, local governments need to maintain a prudent level of financial
resources to protect against a forced service level reduction or having to raise taxes and
fees because of temporary revenue shortfalls or unpredicted one-time expenditures.
Other considerations include the predictability of revenues and the volatility of
expenditures--higher levels of unreserved fund balance may be needed if significant
revenue sources are subject to unpredictable fluctuations or if operating expenditures are
highly volatile. The availability of resources in other funds as well as the potential drain
on the general fund resources from other funds could affect the level of unreserved fund
balance needed. The availability of resources in other funds may reduce the amount of
unreserved fund balance needed in the general fund, just as deficits in other funds may
require that a higher level of unreserved fund balance be maintained in the general fund.
In some cases, the unreserved fund balance in special revenue funds may not be available
for use for general operations of the local government, for example a park dedication
special revenue fund in a city or a ditch special revenue fund in a county. In these
situations, it is important for the local government's fund balance policy to document that
these type of funds are not available for future appropriation to the general operations of
the local government.
Reviewed: January 2008 3
Revised: NA 2007-1022
Appropriate Fund Balance Levels
The Office of the State Auditor recommends that at year-end local governments maintain
an unreserved fund balance in their general fund and special revenue funds of
approximately 35 to 50 percent of fund operating revenues or no less than five months of
operating expenditures, which should provide the local government with adequate funds
until the next property tax revenue collection cycle. The adequacy of unreserved fund
balance should be assessed based on an individual local government's own
circumstances. If the local government's unreserved fund balance is less than or greater
than the 35 to 50 percent recommended above the local government should be able to
explain the reason for the difference.
Local governments should also consider taking a position on the level of unreserved fund
balance in other funds that have unrestricted revenues. In setting an appropriate level, the
local government should consider any long-term forecasting/planning issues, to avoid the
risk of placing too much emphasis on the level of unreserved fund balance at any one
time.
Reviewed: January 2008 4
Revised: NA 2007-1022