Special Report: GASB 54 Implementation Issues

December 2010

This special report is related to certain specific issues we have identified as action items required for  governmental units adopting GASB Statement No. 54 (GASB 54).  Therefore, this report assumes the reader has knowledge of the general GASB 54 definitions and requirements.

Special revenue funds are used to report specific revenue sources that are restricted or committed to specified purposes other than debt service and capital projects, where the restricted or committed revenue sources comprise a substantial portion of the fund’s resources, and are expected to continue to do so in the future.  Under this definition, many recreation and similar funds no longer qualify for special rev-enue fund treatment.  Governments should review their special revenue funds to ensure these funds continue to be special revenue funds.

Governments may need to consider what formal “commitments” the board wishes to adopt, and adopt formal board policies or budget approvals to document these decisions.  Commitments or assignments of fund balance should be made prior to year-end.

The standard also requires disclosure in the financial statements of any minimum fund balance policies, and the purposes for restrictions, commitments, and assignments of fund balance.

Encumbrances previously may have been shown as a reserved fund balance should generally now be shown as either committed (if approved by the highest decision making authority) or assigned (if approved by appropriate officials) based on the constraints placed on them.

Commitments previously disclosed in the notes to the financial statements are also either committed or assigned based on the constraints placed on them.

Stabilization (rainy-day) amounts should be reported as restricted or committed if they meet the criteria.  Stabilization amounts should not be reported as assigned.  The board policy should determine whether it will establish these amounts.  If so, then also need to determine the requirements for additions and conditions under which amounts may be used.

Therefore, to address the above requirements, one or more of the following policy statements, or similarly worded clauses, could be added to the government’s fund balance policy statement (also see separate “Sample City Fund Balance Policy - Preliminary Draft”):

    ●    The board will set aside $$$ for (name) project or future needs as committed fund balance.  (This determination may be general and the detail could be included in the budget document.)

    ●    The board will set aside committed fund balances to cover the amount of outstanding purchase orders or encumbrances that have been approved by the board.

    ●    The board will set aside ## months (or %) of annual revenues (or expenditures) as committed to a stabilization account.

    ●    If the board committed amounts, then statements need to be added such as: “The board will de-termine amounts to be committed, if any, during the budget process.  Should the balance fall be-low $$, the board will identify a plan to restore the committed fund balance to its target as part of the budget process.”

    ●    The board will allow the City Manager (Mayor, Finance Officer, or Finance Committee) to determine the proper amounts to be assigned for purposes as they determine necessary.

    ●    The board will allow the City Manager to determine the amount to be assigned for capital asset replacements (or other issue).

City of Sample, Missouri
Sample City Fund Balance Policy - Preliminary Draft

December 2010

PURPOSE

The City of Sample, Missouri (the City) has enacted the following policy in an effort to ensure financial security through the maintenance of a healthy reserve fund that guides the creation, maintenance, and use of resources for financial stabilization purposes. The City’s primary objective is to maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees due to temporary revenue shortfalls or unpredicted one-time expenditures. The City also seeks to maintain the highest possible credit ratings which are dependent, in part, on the City’s maintenance of a healthy fund balance.

DEFINITIONS

Fund balance -- The excess of assets over liabilities in a governmental fund.

Nonspendable fund balance -- Amounts that are not in a spendable form (such as inventory) or are required to be maintained intact (such as the corpus of an endowment fund).

Restricted fund balance -- Amounts constrained to 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 constrained to specific purposes by a government itself using its highest level of decision-making authority; to be reported as committed, amounts cannot be used for any other purpose unless the government takes the same highest-level action to remove or change the constraint.

Assigned fund balance -- Amounts a government intends to use for a specific purpose; intent can be expressed by the governing body or by an official or body to which the governing body delegates the authority.

Unassigned fund balance -- Amounts that are available for any purpose; these amounts are reported only in the General Fund.

POLICY STATEMENT

The fund balance of the City’s General Fund has been accumulated to meet this purpose, to provide stability and flexibility to respond to unexpected adversity and/or opportunities.

The target is to maintain an unrestricted fund balance of not less than 17% (or other %) of annual operating expenditures for the fiscal year.

The City’s basic goal is to maintain annual expenditure increases at a growth rate, and to limit expenditures to anticipated revenue in order to maintain a balanced budget. The decision to retain an unrestricted fund balance of not less than 17% (or other %) of operating expenditures stems from the following:

    ●    This amount provides adequate funding to cover approximately two (2) months of operating expenses.

    ●    This amount provides the liquidity necessary to accommodate the City’s uneven cash flow, which is inherent in its periodic tax collection schedule.

    ●    This amount provides the liquidity to respond to contingent liabilities.

    ●    The Government Finance Officers Association recommends the minimum General Fund unrestricted fund balance to be maintained should be no less than either two (2) months of regular operating revenues or expenditures.

Beginning in 2011, unassigned fund balance shall be any remaining amounts.

This policy may be amended from time to time per the City Council.

The City will spend the most restricted dollars before less restricted in the following order:
    a.    Nonspendable (if funds becomes spendable)
    b.    Restricted
    c.    Committed
    d.    Assigned
    e.    Unassigned

[The above policy includes basic terms. Precise terms should be determined based on the government’s specific situation.]