POINT ARENA CITY COUNCIL
AGENDA ITEM SUMMARY
AGENDA ITEM: IX B
MEETING DATE: 9/26/2023
TITLE
Establishing a Fund Balance Policy
RECOMMENDED ACTION
Approve Fund Balance Policy
ANALYSIS
One of the primary reasons for establishing a policy for fund balance is to provide sufficient cash flow to meet operating needs. Local government revenues are often cyclical in nature. For example, some revenues come in monthly, some quarterly, and some annually.
This Fund Balance Policy establishes procedures for reporting fund balance classifications, establishes prudent reserve requirements, and establishes a hierarchy of fund balance expenditures. The policy also authorizes and directs the Finance Director (currently our Accountant) to prepare financial reports, which accurately categorize fund balance per Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.
Further, this policy is established to provide a measure of financial protection for the City against unforeseen circumstances and to comply with GASB Statement No. 54. No other policy or procedure supersedes the authority and provisions of this policy.
FISCAL IMPACT
Improved financial accountability
ATTACHMENTS
Point Arena Fund Balance Policy
CITY MANAGER SIGNATURE
_________________________________
Paul Andersen, City Manager
City of Point Arena, California
Fund Balance Policy
1 I. FUND BALANCE POLICY
This Fund Balance Policy establishes procedures for reporting fund balance classifications, establishes prudent reserve requirements, and establishes a hierarchy of fund balance expenditures. The policy also authorizes and directs the Finance Director to prepare financial reports, which accurately categorize fund balance per Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions.
Further, this policy is established in order to provide a measure of financial protection for the City against unforeseen circumstances and to comply with GASB Statement No. 54. No other policy or procedure supersedes the authority and provisions of this policy.
Fund balance is essentially the difference between the assets and liabilities reported in a governmental fund. GASB No. 54 establishes the following five components of fund balance, each of which identifies the extent to which the City is bound to honor constraints on the specific purposes for which amounts can be spent.
A. Non-Spendable Fund Balance
The non-spendable fund balance classification includes amounts that cannot be spent because they are either (a) not in a spendable form; or (b) legally or contractually required to be maintained intact. This category was traditionally reported as a "reserved" fund balance under the past practice.
Examples include: Inventory, Prepaid Amounts, Non-Current Receivables, Land Held for Resale, and Permanent Restrictions.
B. Restricted Fund Balance
The restricted fund balance classification includes amounts that reflect constraints placed on the use of resources (other than non-spendable items) that are either (a) externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. This category was traditionally reported as a "reserved" fund balance under the past practice.
Examples include: Special Revenues from Grants (CDBG, HOME, COPS), Gas Tax, Traffic Safety, Transportation Development Act, Developer Fees, Assessment Districts and Low/Mod Housing Assistance.
City of Point Arena, California
Fund Balance Policy, Continued
2 I. FUND BALANCE POLICY, Continued
C. Committed Fund Balance
The committed fund balance classification includes amounts that can only be used for specific purposes pursuant to constraints imposed by formal action of the government’s highest level of decision making authority (the City Council) and shall remain binding unless removed by taking the same form of action it employed to previously commit those amounts. This category was traditionally reported as a "designated" fund balance under the past practice or Reserve for Encumbrance.
Examples include: Capital Projects, Vehicle Replacement, Technology, Encumbrances.
D. Assigned Fund Balance
The assigned fund balance classification includes amounts that are constrained by the government’s intent to be used for specific purposes, but that are neither restricted nor committed. Such intent needs to be established by (a) the governing body itself; or (b) an official who has been delegated by the governing body to assign amounts to be used for specific purposes. The City Manager is given the authority to assign amounts of fund balance for specific purposes through the budget process, or when he/she deems it necessary. This category was traditionally reported as a "designated" fund balance under the past practice.
Examples include: All Balances not restricted in other governmental funds besides the General Fund.
E. Unassigned Fund Balance
The unassigned fund balance classification includes amounts that do not fall into one of the above four categories. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed, or assigned to specific purposes within the general fund. The General Fund and other governmental funds with deficit fund balance are the only funds that should report this category of fund balance. This category was traditionally reported as an "undesignated" fund balance under the past practice.
City of Point Arena, California
Fund Balance Policy, Continued
3 II. STABILIZATION ARRANGEMENTS (Prudent Reserve)
Per GASB 54, governments have the option to formally set aside unassigned fund balance amounts for use in emergencies, revenue shortages, or budget imbalances. The authority to set aside such amounts can be established by statute, ordinance, resolution, charter, or constitution.
These amounts may be spent only if certain specific circumstances exist. Stabilization amounts should be reported in the general fund as committed. The City’s current fund balance practice provides that restricted fund balance be spent first when an expenditure is incurred for which both restricted and unrestricted fund balance is available.
Similarly, when an expenditure is incurred for purposes for which amounts in any of the unrestricted classifications of fund balance can be used; committed amounts are to be spent first, followed by assigned amounts and then unassigned amounts. GASB No. 54 mandates that this hierarchy of expending fund balance be reported in new categories, using new terminology, and be formally adopted by the City Council. It should be noted that the new categories only emphasize the extent which the City is bound to honor expenditure constraints and the purposes for which amounts can be spent. The total reported fund balances would remain unchanged.
III. COMPONENTS OF FUND BALANCE AS DEFINED BY GASB STATEMENT NO. 54 (Note: These components are current examples only).
A. Non-spendable Fund Balance:
1. Petty Cash: The portion of fund balance that represents the asset amount of petty cash, held by a given fund.
2. Prepaid Expenditures: The portion of fund balance that represents the asset amount of prepaid expenditures, held by a given fund.
3. Advances to Other Funds: The portion of fund balance that represents the asset amount of cash advanced to other funds, held by a given fund.
4. Non-Current Receivable: The portion of fund balance that represents the asset amount of non-current receivable, held by a given fund.
5. Land Held For Resale: The portion of fund balance that represents the asset amount of land inventory that is being held for resale, held by a given fund.
City of Point Arena, California
Fund Balance Policy, Continued
4 III. COMPONENTS OF FUND BALANCE AS DEFINED BY GASB STATEMENT NO. 54, Continued
A. Non-spendable Fund Balance, Continued:
6. Inventories: The portion of fund balance that represents the amount of supply inventories, held by a given fund.
7. Permanent Restrictions: The portion of fund balance which cannot be used to support City programs and is required to be maintained intact.
B. Restricted Fund Balance:
General Fund:
1. CIRA Liability: Required set aside funds by CIRA, the City’s insurance pool, to provide for the City’s self-insured retention for liability insurance.
Special Revenue Funds:
2. Development Services: The portion of fund balance derived from fees collected to be used for development-related activities.
3. Transportation Development Act: The portion of fund balance derived from monies received for construction of curb, gutter, and sidewalk.
4. Developer Fees: The portion of fund balance derived from building fees collected to be used for future facilities and services, such as fire services, police services, parking, storm drainage, local circulation, and general government facility mitigation.
5. Fire Assessment: The portion of fund balance derived from parcel charges collected and was originally designed to fund three firefighter positions.
6. Assessment Districts: The portion of fund balance derived from parcel charges collected to fund maintenance areas related to the specified Assessment District.
7. Lighting and Landscape Districts: The portion of fund balance derived from parcel charges collected to fund maintenance areas related to the specified Lighting and Landscape District.
City of Point Arena, California
Fund Balance Policy, Continued
5 III. COMPONENTS OF FUND BALANCE AS DEFINED BY GASB STATEMENT NO. 54, Continued
B. Restricted Fund Balance, Continued:
8. Capital Projects: The portion of fund balance derived from grants and developers to be used for specific future capital projects throughout the City.
9. CDBG - Various Grants: The portion of fund balance derived from the Federal Department of Housing and Urban Development for infrastructure assistance for low/mod housing project, rehab loans, and economic development loans.
10. COPS Program: The portion of fund balance derived from monies received from granting authority to be used for specifically approved, non-budgeted law enforcement related activities as described in grant.
11. Gas Tax: The portion of fund balance derived from taxes received from the State of California from the sale of gasoline for future construction and/or maintenance of public streets and snow removal.
12. HOME - Various Grants: The portion of fund balance derived from the Federal Department of Housing and Urban Development - HOME, to loan property developer money for low/very low apartment complex development.
13. Traffic Safety: The portion of fund balance derived from monies received for costs associated with traffic safety.
City of Point Arena, California
Fund Balance Policy, Continued
6 III. COMPONENTS OF FUND BALANCE AS DEFINED BY GASB STATEMENT NO. 54, Continued
B. Restricted Fund Balance, Continued:
Debt Service:
14. Bond Proceeds: The portion of fund balance derived from bond proceeds to be used for bond reserve and interest payments.
Fund Balance - Restricted: The portion of fund balance that is in any non-general fund governmental fund that is restricted under the "Restricted Fund Balance" definition as prescribed by Governmental Accounting Standards Board Statement No. 54 and not otherwise defined in this category above.
C. Committed Fund Balance:
1. Vehicle Replacement: The portion of fund balance that is set aside each year during budget adoption or as otherwise appropriated to be used in future years for the City’s vehicle purchase or replacement.
2. Technology: The portion of fund balance that is set aside each year during budget adoption or as otherwise appropriated to be used in future years for the City’s technology purchase or replacement.
3. Capital Projects: The portion of fund balance that has been appropriated for specified capital projects and remains unspent.
4. Encumbrances: The portion of fund balance that sets aside a portion of appropriations for purchases ordered, but not yet received or invoiced.
Fund Balance - Committed. The portion of fund balance that is in any non-general fund governmental fund that is committed under the "Committed Fund Balance" definition as prescribed by Governmental Accounting Standards Board Statement No. 54 and not otherwise defined in this category above.
City of Point Arena, California
Fund Balance Policy, Continued
7 III. COMPONENTS OF FUND BALANCE AS DEFINED BY GASB STATEMENT NO. 54, Continued
D. Assigned Fund Balance:
As provided in the explanation these balances remain after all restrictions of fund balance in any governmental fund (Special Revenue, Capital Projects, or Debt Service) other than the General Fund.
Fund Balance – Assigned: The portion of fund balance that is in any non-general fund governmental fund that is assigned under the "Assigned Fund Balance" definition as prescribed by Governmental Accounting Standards Board Statement No. 54 and not otherwise defined in this category above.
E. Unassigned Fund Balance (General Fund or Other Governmental Fund with a Deficit):
Fund Balance: Any portion of General Fund, fund balance that does not fall under any of the fund balance definitions presented above as well as deficit fund balances in other governmental funds.