CITY OF FONTANA
General Fund Reserve Policy
2023
Prepared by the Finance Department
Jessica Brown, Chief Financial Officer
Contents
PURPOSE 1
POLICY 1
1. Adequate Financial Reserves 1
2. Financial Reporting versus Budget 1
3. Fund Balance Defined 1
4. General Fund Committed Fund Balance 2
5. Target Levels and Methodology for Committed Fund Balance 2
6. Methodology to Meet Target Reserve Levels 3
7. Replenishment of General Fund Reserves 3
8. Assigned Fund Balance 3
9. Unassigned Fund Balance 4
PURPOSE
The City is committed to prudent fiscal practices and maintaining adequate General Fund reserves to ensure consistent, uninterrupted municipal services in the event of unexpected temporary revenue shortfalls or unpredicted one-time expenditures, as well as the creditworthiness of the City. The General Fund Reserve Policy (the Policy) establishes the appropriate level of unassigned fund balance in the General Fund, sets conditions warranting its use, and outlines the plan to replenish it if the balance fell below the Policy level.
POLICY
The General Fund is the City’s primary operating fund. It is not connected to any one specific revenue source and pays for general services provided by the City as well as public safety and capital improvements. A vital attribute of a financially stable organization is having the appropriate level of reserves. It allows the City to mitigate current and future financial risks resulting from economic instability or catastrophic loss.
Adequate Financial Reserves
The City shall establish and maintain adequate financial reserves to prepare for the impact economic cycles, and physical disasters have upon essential services to the public and ensure annual fluctuations in revenue do not impede the City’s ability to meet expenditure obligations.
Financial Reporting versus Budget
Fund balance, as a measurement of financial resources available in a governmental fund, is used in both financial reporting and budgeting. There are differences between the two, which will likely result in different amounts reported in the financial statements and the budget. Financial statements report the total of all General Fund and its sub-funds’ fund balances, yet budgetary fund balance typically focuses on the General Fund itself only. In addition, the timing difference in recognition of revenues and expenditures also contributes to the variance between the two. For example, encumbrances arising from purchase orders and contracts reduce budgetary fund balance, yet it has no impact on the financial statements.
Fund Balance Defined
In the context of financial reporting, the term fund balance is used to describe the difference between the assets and liabilities reported in a governmental fund. Under current accounting standards, there are five separate components of fund balance:
Nonspendable Fund Balance (inherently non-spendable, such as inventory) Restricted Fund Balance (externally enforceable limitations on use, such as grants, contributions, or endowments) Committed Fund Balance (self-imposed limitation on use through City Council action) Assigned Fund Balance (limitation resulting from intended use) Unassigned Fund Balance (residual net resources)
The first two components listed above are not specifically addressed in the Policy due to the nature of their restrictions.
General Fund Committed Fund Balance
The City Council, as the City’s highest level of decision-making authority, may commit fund balance for specific purposes pursuant to constraints imposed by formal actions taken, such as an ordinance or resolution. These committed amounts cannot be used for any other purpose unless the City Council removes or changes the specified use through the same type of formal action taken to establish the commitment. City Council action to commit fund balance needs to occur within the fiscal period; however, the amount can be determined subsequently. Two committed fund balances shall be maintained:
General Fund Contingencies Reserves shall have committed fund balance to mitigate financial risks associated with unforeseen or unexpected revenue shortfalls due to changes in the economic environment and to mitigate costs associated with public emergencies such as natural disasters or other catastrophic events. In times of economic downturn, if revenues are insufficient to meet the normal operating requirements of essential services or in the event of extreme, one-time events, such as earthquakes, fires, floods, civil disturbance, and terrorist attacks, funds contained in the Contingencies Reserve may be used if authorized by a two-thirds vote of the City Council.
General Fund Operating Reserves shall have a committed fund balance to provide one-time funding for unexpected or unprogrammed operational needs and may be used if authorized by a majority vote of the City Council.
Target Levels and Methodology for Committed Fund Balance General Fund Contingencies Reserve – Per the Government Finance Officers Association (GFOA), it is recommended, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted budgetary fund balance in their General Fund of no less than two months of regular General Fund operating revenues or expenditures. Following sound financial practices and adhering to the GFOA recommendation, the City commits to maintaining a minimum level of 25% (or two months) of adopted operating expenditures, with a goal of reaching 30% over time in Contingency Reserves.
The methodology for calculating the required 25% Committed Fund Balance is 25% of budgeted operating expenditures, excluding one-time expenditures. One-time expenditures are identified with the adoption of the annual budget.
General Fund Operating Reserves – reserves shall have a committed fund balance of $2.0 million.
Methodology to Meet Target Reserve Levels
At the end of each fiscal year, the Finance Department reports on the audited fiscal results. Should actual General Fund revenues exceed expenditures and encumbrances/carryovers, a year-end operating surplus shall be reported. The yearend surplus could be appropriated as follows (listed in order of priority):
Meet the required minimum funding target reserve levels as set by the Target Levels and Methodology for Committed Fund Balance above.
Based upon the City Manager’s direction, commit additional funding to the Committed Fund Balance Contingency Reserve up to 30%.
Replenishment of General Fund Reserves
A replenishment schedule shall be adopted simultaneously with the appropriation from the reserve funds. Replenishment shall begin no later than 5 years from the year of the appropriation and be completed within 10 years.
Assigned Fund Balance
Amounts that are constrained by the City’s intent to be used for specific purposes, but are neither restricted nor committed, are considered as Assigned Fund Balance. This policy hereby delegates the authority to assign amounts for specific purposes to the City Manager. Assigned Fund Balance could include:
Encumbrances – goods and services on purchase orders and contracts that are to be delivered.
Carryover – appropriation by City Council for specific projects or programs that were not completed and not encumbered by fiscal year-end.
GASB 31 Gain – unrealized investment gains that have been recorded in the financial statement in accordance with governmental accounting standards.
Set Asides – amount designated for certain capital replacement, reduction of debt, special events or non-recurring expenditure needs of the City.
Unassigned Fund Balance
Unassigned fund balance results from when fund balance exceeds the combined total of non-spendable, restricted, committed and assigned fund balances. As the City is committed to prudent fiscal practices, upon final close of the fiscal year, any unassigned fund balance, less any encumbrances and budget being carried forward to the next fiscal year, shall be appropriated 50/50 between the prefunding of the City’s pension unfunded liability and road. 2 City of Fontana
General Fund Reserve Policy
City of Fontana
General Fund Reserve Policy