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HomeMy WebLinkAbout11-171 Resolution No. 11-171 RESOLUTION ESTABLISHING A POLICY ON FUND BALANCE CLASSIFICATION AND DISBURSEMENT IN ACCORDANCE WITH GOVERNMENTAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 54 BE IT RESOLVED BY THE CITY COUNCIL OF THE CITY OF ELGIN,ILLINOIS,that it hereby establishes a policy on fund balance classification and disbursement in accordance with governmental accounting standards board statement no. 54 as follows: PURPOSE The purpose of this policy is to define the components of fund balance,describe how amounts are classified into each component and to establish the order of use of fund balance in all governmental funds.The City of Elgin will use GASB's definitions of fund balance for the annual financial reports and for all other financial reporting. BACKGROUND In February 2009, the Governmental Accounting Standards Board (GASB) issued Statement No. 54,Fund Balance Reporting and Governmental Fund Type Definition. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. GASB Statement No. 54 will shift the focus of fund balance reporting from the availability of fund resources for budgeting to "the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent". • COMPONENTS OF FUND BALANCE Fund balance is an important measure that represents the difference between a fund's assets and liabilities. GASB Statement No. 54 establishes five components of fund balance. Nonspendable fund balance - Amounts that are not in a spendable form or are required to be maintained intact. Restricted fund balance-Amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through 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. Assigned fund balance - Amounts that are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed.In governmental funds other than the general fund,assigned fund balance represents the remaining amount that is not restricted or committed. Unassigned fund balance - The residual classification for the City's general fund and includes all spendable amounts not contained in the other classifications.In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed or assigned. CLASSIFYING FUND BALANCE Nonspendable and Restricted fund balances - determined by the nature of their restrictions. 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 reporting period; however the amount can be determined subsequently Assigned fund balance—This policy hereby delegates the authority to assign amounts to be used for specific purposes to the Chief Financial Officer for the purpose of reporting these amounts in the annual financial statements. Unassigned fund balance These are residual positive net resources in the general fund in excess of what can properly be classified in one of the other four categories and deficient balances in all other funds. SPENDING ORDER OF FUND BALANCE Fund balance classifications should depict the nature of the net resources that are reported in the governmental fund. Fund balance in individual governmental funds may be comprised of a single classification or many classifications. When both restricted and unrestricted funds are available for expenditures, it is the City's policy to expend restricted resources first then unrestricted resources. - 2 - Unrestricted fund balance includes the committed, assigned, and unassigned classifications. When any of these amounts are available for expenditure, it is the City's policy to expend committed resources first, followed by assigned, then unassigned resources. s/David J. Kaptain David J. Kaptain, Mayor Presented: October 12, 2011 Adopted: October 12, 2011 Omnibus Vote: Yeas: 7 Nays: 0 Attest: s/Kimberly Dewis Kimberly Dewis, City Clerk - 3 - Iif •PORT TO MAYOR &MEMBERS OF CITY COUNCIL ELGIN THE CITY IN THE SUBURBS AGENDA ITEM: B MEETING DATE: September 28, 2011 ITEM: Policy on Fund Balance Classification and Disbursement in Accordance with Governmental Ac- counting Standards Board Statement No. 54 (No Cost to the City) OBJECTIVE: Implement Governmental Accounting Standards Board Statement No. 54 by adopting a policy to define the components of fund balance, assign authority to classify certain components of fund balance and establish the spending order of fund balance for governmental funds. RECOMMENDATION: Adopt the proposed policy on fund balance classification and disbursement. • BACKGROUND In February 2009, the Government Accounting Standards Board (GASB) issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, which requires the city council to make certain decisions regarding the use of resources and classifications of ending fund balance. The objective of this statement is to enhance the usefulness of fund balance in- formation by providing clearer fund balance classifications and by clarifying the existing go- vernmental fund type definitions. This statement does not change the amount of fund balance that the city reports but does redefine the components of fund balance. This statement is effec- tive for fiscal year ending December 31, 2011. Implementation of GASB Statement No. 54 is re- quired to comply with Generally Accepted Accounting Principles (GAAP) and applies only to the governmental funds (general, special revenue, debt service, capital project funds and perma- nent funds). The city's three enterprise funds (water, sewer and golf) are not impacted by this statement. GASB Statement No. 54 created a hierarchy of fund balance classifications. These classifications are based primarily on the extent to which governments are bound by the constraints placed on resources reported in the funds. There are five new classifications of fund balance. These classi- fications are: • Nonspendable fund balance—Amounts that are not in spendable form or are required _ . to be maintained intact. Examples are long-term loan receivables or the principal of the cemetery perpetual care fund. • Restricted fund balance—Amounts that can be spent only for the specific purposes sti- pulated by constitution, external resource providers or through enabling legislation. Ex- amples are restrictions imposed on grant proceeds or restrictions on the use of funds that were determined in the same legislation that created the revenue (i.e. E-911 reve- nues). • Committed fund balance—Amounts that can be used only for the specific purposes de- termined by a formal action of the government's highest level of decision-making au- thority. The city's highest level of decision making authority is the city council and com- mitments can be made by city council through a formal action such as a resolution or ordinance. The city council must commit the purpose of the fund balance prior to year end but may determine the exact dollar amount after year end. In order to rescind or change committed fund balance the city council would need to remove the commit- ment using the same formal action that was taken to commit the funds. Committed fund balance represents a limitation the city imposes upon itself. • Assigned fund balance—Amounts that are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or commit- ted. Assignment of fund balance requires less formal action than a commitment as does the rescinding or changing of assignments. The city council may assign fund balance or may delegate the authority to assign fund balance to a city official. • Unassigned fund balance—The residual classification for the general fund and any defi- cit fund balances in other governmental funds. OPERATIONAL ANALYSIS Classification of funds as non-spendable will occur when the balances are not convertible to cash or are considered to be permanent funds. Fund balances will be classified as restricted upon determination that the inflows and outflows of resources and balances are constrained to a specific purpose by enabling legislation, external parties or constitutional provisions. The fund balance classification and disbursement policy proposed would define the decision- making authority for commitment of fund balance as the city council and the formal action as a resolution or ordinance. Committed fund balance represents a limitation that the city imposes upon itself. In order to commit fund balance, the city council would need to formally commit a portion of existing fund balance prior to the end of the fiscal year; however, the exact dollar amount of the commitment can be determined after year end. In order to reverse this com- mitment and allow the committed fund balance to be used for other purposes, the city council would need to remove the commitment using the same type of action taken to commit the 2 • funds (resolution or ordinance). The primary difference between restricted fund balance and committed fund balance is the ability to redeploy the funds. The proposed policy would delegate the authority to assign fund balance to the chief financial officer. Assigning fund balance is based on intent and does not limit the future use of amounts assigned. The proposed policy would set the city's spending order of fund balance as using the most re- stricted funds available for expenditures first. As part of the Statement No. 54 project, GASB determined that clarifying certain terms used in governmental fund type definitions would improve consistency on how fund types were re- ported. The changes to the general fund, debt service fund and capital project fund definitions are minor and for the most part require only the incorporation of the new classifications within the fund balance. In contrast, the definition of special revenue funds has changed and requires that certain city special revenue funds be reclassified for reporting purposes. Special revenue funds are now restricted to those that account for and report the proceeds of a specific reve- nue source that is either restricted or committed. An analysis of the city's current special revenue funds was prepared based on the new defini- tion of a special revenue fund. Staff determined that the Elgin Riverboat Fund and the Grand • Victoria Lease Fund no longer meet the definition of a special revenue fund and should be re- ported as part of the general fund. This is because the revenue inflows into the aforementioned funds are not restricted or committed to expenditures for a specific purpose. GASB Statement No. 54 affects only the reporting of governmental funds in the general purpose external finan- cial reports in conformity with GAAP. The city is not required to combine the aforementioned funds into the general fund on the general ledger. The city may continue to use the funds as they exist now for internal accounting and budgeting purposes. As implementation of GASB Statement No. 54 is required to be in compliance with GAAP, no new policies are required to reflect the combining of the aforementioned funds into the general fund for external financial reporting purposes. GASB Statement No. 54 is a financial reporting standard only. It does not require combining funds on the general ledger or the budget. This statement will not change the amount of fund balance that the city reports. The only modification will be how fund balance is classified. A comparison of how the fund balance classifications will change upon implementation of GASB 54 is included for review. INTERESTED PERSONS CONTACTED The city's auditor, Sikich LLP. • 3 FINANCIAL ANALYSIS There will be no financial impact in delegating to the chief financial officer the authority to as- sign fund balance or to setting the spending order of fund balance as spending the most re- stricted funds available first. These decisions will not change the value of fund balance, but will alter the presentation of fund balance on the financial statements. GASB Statement No. 54 is a financial reporting standard only. BUDGET IMPACT FUND(S) ACCOUNT(S) PROJECT#(S) AMOUNT AMOUNT BUDGETED AVAILABLE N/A N/A N/A N/A N/A LEGAL IMPACT None. ALTERNATIVES 1. The city council may choose to retain the authority to assign fund balance and/or change the spending order of fund balance to expend the least restricted classification • first. 2. The city council may choose to give the authority to assign fund balance to a city staff member other than the chief financial officer and/or alter the spending order of fund balance to expend the least restricted classification first. NEXT STEPS 1. Adopt the policy on fund balance classification and disbursement. 2. Commit (if desired) fund balance prior to year end. Originators: Amy Grellner, Accountant Final Review: Colleen Lavery, Chief Financial Officer William A. Cogley, Corporation Counsel/Chief Development Officer Richard G. Kozal, Assistant City Manager/Chief Operating Officer Sean R. Stegall, City Manager 4 • ATTACHMENTS A: Policy on Fund Balance Classification and Disbursement B: Fund Balance Comparison Post GASB 54 Implementation • 5 POLICY ON FUND BALANCE CLASSIFICATION AND DISBURSEMENT PURPOSE The purpose of this policy is to define the components of fund balance, describe how amounts are classified into each component and to establish the order of use of fund balance in all governmental funds. The City of Elgin will use GASB's definitions of fund balance for the annual financial reports and for all other financial reporting. BACKGROUND In February 2009,the Governmental Accounting Standards Board (GASB) issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definition. The objective of this Statement is to enhance the usefulness of fund balance information by providing clearer fund balance classifications that can be more consistently applied and by clarifying the existing governmental fund type definitions. GASB Statement No. 54 will shift the focus of fund balance reporting from the availability of fund resources for budgeting to"the extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent". COMPONENTS OF FUND BALANCE Fund balance is an important measure that represents the difference between a fund's assets and liabilities. GASB Statement No. 54 establishes five components of fund balance. • Nonspendable fund balance -Amounts that are not in a spendable form or are required to be maintained intact. • Restricted fund balance -Amounts that can be spent only for the specific purposes stipulated by constitution, external resource providers, or through 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. • Assigned fund balance - Amounts that are intended to be used by the government for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds other than the general fund, assigned fund balance represents the remaining amount that is not restricted or committed. • Unassigned fund balance -The residual classification for the City's general fund and includes all spendable amounts not contained in the other classifications. In other funds, the unassigned classification should be used only to report a deficit balance resulting from overspending for specific purposes for which amounts had been restricted, committed or assigned. • CLASSIFYING FUND BALANCE Nonspendable and Restricted fund balances - determined by the nature of their restrictions. 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 reporting period; however the amount can be determined subsequently Assigned fund balance—This policy hereby delegates the authority to assign amounts to be used for specific purposes to the Chief Financial Officer for the purpose of reporting these amounts in the annual financial statements. Unassigned fund balance—These are residual positive net resources in the general fund in excess of what can properly be classified in one of the other four categories and deficient balances in all other funds. SPENDING ORDER OF FUND BALANCE • Fund balance classifications should depict the nature of the net resources that are reported in the governmental fund. Fund balance in individual governmental funds may be comprised of a single classification or many classifications. When both restricted and unrestricted funds are available for expenditures, it is the City's policy to expend restricted resources first then unrestricted resources. Unrestricted fund balance includes the committed, assigned, and unassigned classifications. When any of these amounts are available for expenditure, it is the City's policy to expend committed resources first, followed by assigned, then unassigned resources. • Fund Balance Classification Comparison Post GASB 54 Implementation Fund Pre GASB 54 classification GASB 54 classification Revenue Source/Source of classification Public Benefit Fund Reserved for debt service Restricted for debt service Property tax by state statute CDGB No fund balance No fund balance Grant Spring Street Parking Deck Reserved for economic Restricted for economic Property tax by state statute development development Motor Fuel Tax Reserved for maintenance of Restricted for maintenance State Statute roadways of roadways Illinois Municipal Reserved for employee Restricted for employee Property Tax by state statute, Retirement Fund retirement retirement Replacement Tax, Employee withholding Drug Asset Forfeiture Reserved for public safety Restricted for public safety State Statute, Federal - Department of Justice Recreation Fund Reserved for prepaid items Nonspendable —prepaid Not in spendable form Not used Committed for recreation Amounts committed by council a Not used Committed for building Formal commitment by city council reserve by resolution or ordinance. Unreserved-designated special Assigned for building Assigned by the chief financial revenue reserve officer Unreserved-undesignated Assigned for recreation All other sources not otherwise special revenue categorized Emergency Telephone Reserved for public safety Restricted for public safety Enabling legislation for telephone System surcharge Central Area Tax Reserved for economic Restricted for economic Property tax, Grants, Transfers Allocation development development from contiguous TIF districts Route 20 Tax Allocation Reserved for economic Restricted for economic Property Tax development development Cemetery Reserved for cemetery perpetual Nonspendable—cemetery Perpetual Care Fund — Fund 520 care perpetual care Not used Restricted for cemetery Charges for services— by enabling legislation Unreserved-undesignated Assigned for cemetery All other sources not otherwise special revenue categorized • • • Fund Balance Classification Comparison Post GASB 54 Implementation Park Development Reserved for capital outlay Restricted for capital outlay Grants, Impact Fees by enabling legislation Tyler Creek Reserved for capital outlay Restricted for capital outlay Debt proceeds Capital Improvement Reserved for capital outlay Restricted for capital outlay Property Taxes (SSA 19), Debt proceeds 2000 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2001 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2002 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2003 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2004 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2005 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2006 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2007 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2009 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2010 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds 2011 Corporate Bond Reserved for capital outlay Restricted for capital outlay Debt proceeds Debt Service Reserved for debt service Restricted for debt service Property tax General Fund (includes Reserved for advances to other Nonspendable—advances Not in spendable form the general fund, funds to other funds riverboat fund, riverboat Unreserved Undesignated 3 Restricted for "specific Grants lease) purpose" 2 Unreserved Undesignated 3 Committed for "specific Example-Economic development purpose" agreements Unreserved Undesignated 3 Assigned for "specific Example-Carryover from prior purpose" years for street projects the city intends to start in future years Example-Carryover from prior years for cash reserves Unreserved Undesignated Unassigned All other sources not otherwise categorized Fund Balance Classification Comparison Post GASB 54 Implementation 1. For the fiscal year ended December 31, 2010, $160,000 of the park and recreation departments fund balance was designated as a reserve for building maintenance. Under GASB 54, the $160,000 would need to be committed or assigned for a reserve for building maintenance. a. To commit the $160,000 to a reserve for building maintenance the city council would need to pass a resolution (or ordinance) formally committing the funds for this purpose. If, at a later date, city council wanted to remove this reserve and allow the money to be used for a different purpose, a resolution would need to be passed releasing these funds. A commitment is a formal restriction that the city places upon itself. b. To assign the $160,000 for a reserve for building maintenance the chief financial officer (or another designated employee) would assign this amount for this purpose. If at a later date, the city wanted to remove this reserve and allow the money to be used for a different purpose there would be no formal action required. Assigned fund balance is a less formal restriction than a commitment and is based on intent. 2. For the year ended December 31, 2011, the general fund, riverboat fund, and riverboat lease fund will be combined for financial statement reporting purposes. This is because the riverboat and riverboat lease funds no longer meet the definition of a special revenue fund as defined under GASB 54. This combined fund is for financial statement reporting purposes only. These funds will still be budgeted and accounted for as separate funds for internal purposes. 3. A specific purpose must be identified when restricting, committing and assigning fund balances. 4. For the year ended December 31,2011, city council must "commit" a revenue source to the parks and recreation fund in order for it to continue to be classified as a special revenue fund. This can be accomplished by committing the revenue sources generated by the recreation department to the parks and recreation fund. There are two approaches for committing these revenue sources. The first is to include a statement to this effect within the user feerschedules that are adopted each year. The second is to take formal action (resolution or ordinance) declaring that all revenue generated by parks and recreation is to be used for recreation fund purposes.