Fund Balance, Fund Balance Practices and Budget Adjustments

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1 Fund Balance, Fund Balance Practices and Budget Adjustments WASBO Accounting Conference Wednesday, March 11, 2015 Robert W. Baird & Co. Incorporated is providing this information to you for discussion purposes. The materials do not contemplate or relate to a future issuance of municipal securities. Baird is not recommending that you take any action, and this information is not intended to be regarded as advice within the meaning of Section 15B of the Securities Exchange Act of 1934 or the rules thereunder. AGENDA 1. General Concepts of Fund Accounting 2. Fund Balance: a. What is a Fund Balance? b. When Does a Fund Balance Change? c. How do Districts Use the Cash Portion of Fund Balance? d. How Large Should a Fund Balance Be? e. Why is Having a Viable Fund Balance Important? 3. Budget Approval and Amendments a. How is a Budget Adopted b. What Changes Require Budget Changes/Amendments i. How are the Changes Made ii. What Notifications Must Occur Page 2 1

2 General Concepts of Fund Accounting Page 3 Organizing Accounting School districts organize their accounting systems on a Fund" basis A Fund is a separate set of accounting records, segregated for purpose of carrying on an activity A Fund is established for accountability purposes to demonstrate that financial resources are being used only for permitted purposes Think of each fund as a self-contained box. Page 4 2

Revenue accounts are used to record activity such as receiving money from local, state, federal and other source. Revenue usually increases Assets.

3 Revenue accounts are used to record activity such as receiving money from local, state, federal and other source. Revenue usually increases Assets. Expenditure accounts are used to record activity such as paying salaries, benefits, contracted services, travel, food, transportation, equipment, supplies, utilities, principal and interest, etc. Expenditures usually decrease Assets. Expenditures can increase or decrease Liability. The difference between Revenue and Expenditure at the end of a year is called the Change in Equity. That is the amount by which Fund Balance increased or decreased from the prior year. Page 5 What is a Fund Balance? Page 6 3

The fund may also have liabilities, such as an accounts payable amount due a supplier, that could result in a decrease in fund cash when they are paid off.

4 A common misconception is that fund balance is a cash account, and therefore corresponds to the district's bank balance. A fund balance represents the fund's total assets minus its liabilities (what a fund owns minus what it owes). Cash is an asset, but it usually is not a fund's only asset. The fund may also have liabilities, such as an accounts payable amount due a supplier, that could result in a decrease in fund cash when they are paid off. Cash Receivables Payables ST Borrowing Fund Balance Assets Liabilities Equity Page 7 Fund Balance is the difference between Assets and Liability! Examples: Assets (Cash, Investments, Inventory, Prepays, Due From) $2,063,216 Liabilities (Payroll, Accounts Payable, Taxes, Due To) $ 967,856 Fund Balance $1,095,360 What a Fund owns minus what it owes. Inventory + Cash - Staff and Operating Expense Page 8 4

5 Balance Sheet (For the Numbers Geeks) Fund Balance is date specific. The hypothetical example is for illustrative purposes only. Page 9 Ok, maybe too much data. Page 10 5

6 When Does a Fund Balance Change? Page 11 Fund Balance June 30 A Fund Balance changes daily. When revenue comes in, a fund balance increases. When expenditures are made, a fund balance decreases. A school district s fiscal year is July 1 to June 30, a Fund Balance is required to be reported and compared as of June 30 th. Assets Liabilities Fund Balance Page 12 6

7 How does a fund balance grow or shrink? Prior Year Fund Balance Current Year Change in Equity Ending Fund Balance Page 13 Types of Fund Balance Fund Balance Can be classified in one of five ways: Does NOT mean excess! 1. Nonspendable Fund Balance Prepaid Expenses & Inventory 2. Restricted Fund Balance Self-insurance, contracts, debt, legal restrictions 3. Committed Fund Balance Formal Board action, part of budget, restricted donations. 4. Assigned Fund Balance Board assigned, capital projects, budgeted 5. Unassigned Fund Balance This slide is thrilling for the hard core accounting folks. Page 14 7

8 1. Non Spendable Fund Balances (WUFAR Function ) Cannot be spent and meet one of the following conditions: Non spendable fund balance (WUFAR Code ) is not in spendable form and cannot be converted to cash. Examples include prepaid expenses and inventories. Corpus of permanent fund (WUFAR Code ) is legally or contractually required to be maintained intact. Page Restricted Fund Balances (WUFAR Function ) Restricted fund balances (WUFAR Function ) exist when net fund resources are subject to externally enforceable legal restrictions. Restrictions can be externally imposed by creditors (such as through debt covenants), grantors, contributors, or laws or regulations of other governments or imposed by law through constitutional provisions or enabling legislation. The WUFAR includes the following seven accounts within this restricted category. a. Restricted for self insurance (WUFAR Code ) is the segregation of a portion of a fund balance that is restricted for self insurance purposes. b. Restricted for contractual obligations (WUFAR Code ) is the segregation of fund balances for any contractual obligations. c. Restricted for debt refinancing (WUFAR Code ) is the portion of a fund balance representing unexpended proceeds from debt incurred for refinancing. Page 16 8

9 d. Restricted for other debt service retirement (WUFAR Code ) is the remaining balance in debt service funds not previously coded to e. Restricted for food service programs (WUFAR Code ) is the fund balance remaining in the food service fund at year end not coded to f. Restricted for elderly nutrition programs (WUFAR Code ) is the portion of fund balance restricted for elderly nutrition program. g. Restricted fund balance (WUFAR Code ) is the portion of fund balance that is restricted, as defined within the paragraph immediately following #2 above, but not included in the any of the above bullet categories. Page Committed Fund Balances (WUFAR Function ) Committed fund balance (WUFAR Function ) can only be used for specific purposes pursuant to constraints imposed by formal action of the board and cannot be used for any other purpose unless the board removes or changes the specified use by taking the same type of action it employed to previously commit those amounts. a. Annual commitments must be made prior to the end of a respective fiscal year, although the amount may be determined subsequent to the fiscal year. Use of committed funds for intended purposes shall be authorized as part of the annual budget process and any additions or reductions of funds for commitments previously authorized shall be authorized in conjunction with budget adoption or year end closing board action. b. Donations and fund raising activities not specifically restricted by a third party shall be considered committed. Page 18 9

10 4. Assigned Fund Balances (WUFAR Function ) Assigned fund balance (WUFAR Function ) can be used for specific purposes provided that a restriction or commitment is not applicable. Through this policy, the board authorizes the director of business services to determine assigned funds. The following amounts shall be treated as assigned amounts at fiscal end of year. a. Budget assigned during the adoption of the budget for subsequent year expenditures. b. Capital projects and grants that have not been completed and are not otherwise committed or restricted. c. Sufficient working capital to finance operating expenditures to minimize or eliminate short term borrowing for cash flow purposes. d. All governmental funds other than the general fund shall report all nonspecified fund balances as assigned due to the nature and purpose of the fund to exist for its intended purpose. Page Unassigned Fund Balances (WUFAR Function ) Unassigned fund balance (WUFAR Function ) Not subject to the district s general fund tentative management plans. The only other time a governmental fund can be reported as unassigned is if the fund reports a deficit. Page 20 10

11 How do Districts use the cash portion of fund balance? Page 21 Districts use of the cash portion of fund balance meet financial obligations. Cash Flow = Paying our bills! Page 22 11

12 Changes in Monthly Cash Balances Cash Balance At End Of Month July $12,414,422 $15,289,471 $6,785,988 August $14,958,159 $18,616,219 $13,025,677 September $15,220,402 $18,911,448 $13,073,891 October $3,369,764 $7,938,236 $6,787,756 November $2,932,124 $2,880,331 $1,763,814 Low Point* ($2,067,876) $800,000 ($405,269) December $8,521,917 $5,532,884 $6,317,039 January $14,249,578 $5,860,448 $12,252,838 February $19,183,925 $11,129,389 $13,875,798 March $22,355,534 $15,621,826 $18,446,336 April $16,511,551 $9,847,413 $13,498,377 May $12,565,848 $5,386,993 $10,075,594 Low Point* $1,565,848 ($613,007) ($1,742,933) June $19,936,028 $11,368,124 $9,610,989 State Aid: Jul 1.687% (Delayed Prior Yr); Sep 15% 1.97% (Delayed Prior Yr); Dec 40% 1.95%; Mar 25% 1.95%; Jun 35% 1.95%; Jul 1.95%. Property taxes come in January, February, and August. This is a hypothetical example and for illustrative purposes only. Source: Wisconsin Department of Public Instruction, and District data. Page 23 Changes in Monthly Cash Balances $25,000,000 $20,000,000 $15,000,000 $10,000,000 $5,000, $0 -$5,000,000 This is a hypothetical example and for illustrative purposes only. Page 24 12

Cash Flow Fluctuations Expenditures fairly constant

of budget Typically spread over 24 or 26 pay

Revenues received sporadically throughout the year

general fund revenue budget Received in scheduled

May June Tax Levy X X X X Equalization Aid X 15%

, 33% SAGE 15% Spec. Ed. 15% Spec. Ed., Transp.

, 33% SAGE , Per Pupil Common School Fund , 33%

Expenditures Thousands $8,000 $7,000 $6,000 $5,000

13 Cash Flow Fluctuations Expenditures fairly constant throughout year Salaries / Fringe typically 75% 85% of budget Typically spread over 24 or 26 pay periods May need to adjust for end of year pay Revenues received sporadically throughout the year Tax Levy and Equalization Aid can be 85% 95% of general fund revenue budget Received in scheduled months July Aug Sept Oct Nov Dec Jan Feb Mar Apr May June Tax Levy X X X X Equalization Aid X 15% 25% 25% 35% Categorical Aids 15% Spec. Ed., 33% SAGE 15% Spec. Ed. 15% Spec. Ed., Transp. 15% Spec. Ed., 33% SAGE 15% Spec. Ed., Per Pupil Common School Fund 15% Spec. Ed., 33% SAGE Page 25 Revenue vs. Expenditures Thousands $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 July October January April June September Total Receipts Total Disbursements Page 26 13

14 Fund Balance June 30 Fund Balance is measured at the end of each fiscal year, June 30th. This is because every day during the fiscal year the fund balance changes based upon the ebb and flow of assets and liabilities. For measurement purposes, one point in time must be selected and the end of the fiscal year is that point as determined by the Governmental Accountability Standards Board (GASB). Page 27 How Large Should A Fund Balance Be? Page 28 14

Perhaps the best answer is: "an amount sufficient to avoid short term borrowing for cash flow and allows the district to set aside sufficient assets to realize long range goals.

15 Perhaps the best answer is: "an amount sufficient to avoid short term borrowing for cash flow and allows the district to set aside sufficient assets to realize long range goals." Like one s savings account, once cash is expended from fund balance it is a difficult and lengthy process to rebuild the balance. When it s gone, it s gone!! Page 29 How Large A Fund Balance? Determination of an appropriate fund balance is a critical factor in district financial planning and budgeting processes, but it is strictly a local matter The Department of Public Instruction makes no recommendation regarding the amount a district should have as its General Fund balance, except that the department encourages districts to seek legal counsel should they contemplate budgeting for and/or operating with a negative general fund balance Source: Wisconsin Department of Public Instruction, Page 30 15

Page 31 A district with an appropriate fund balance can... 1.

16 Page 31 A district with an appropriate fund balance can Avoid excessive short term borrowing thereby avoiding associated interest cost This District currently does not need to borrow short term to meet cash flow shortages. 2. Accumulate sufficient assets to make designated purchases or cover unforeseen expenditure needs Depending upon the scope of an unforeseen emergency, the District has some ability to react. 3. Demonstrate financial stability and therefore preserve or enhance its bond rating, thereby lowering debt issuance costs Page 32 16

17 Why Is Having A Viable Fund Balance Important? Page 33 A Viable Fund Balance Is Important Because It Avoids excessive short term borrowing and associated interest cost Accumulates sufficient assets allowing unexpected purchases for unforeseen major expenditures Demonstrates financial stability and therefore preserves or enhances bond rating, thereby lowering debt issuance costs Page 34 17

18 Rating Agency Thoughts on Fund Balance 1. Fund Balance policy is important 2. Higher Fund Balance is looked upon favorably 3. Consistency of Fund Balance important 4. Use of Fund Balance should be explained a. Best if used only for one time purpose b. Best if commitment is shown to rebuild Page 35 Credit Rating *The better the credit, the lower the interest cost Page 36 18

School Districts Are Rolling In Money! Not! Wisconsin s school districts are not rolling in money. There never has been, nor will there likely ever be enough money available for such abundance.

19 School Districts Are Rolling In Money! Not! Wisconsin s school districts are not rolling in money. There never has been, nor will there likely ever be enough money available for such abundance. Of all the myriad of changes that affect the thousands of accounts within a school budget, it may come to pass that more funds remain at year end than expected. Other accounts the following year will produce different results because of that year s experience with variables. Unusual circumstances often create unusual results. If money is left over it is good, if not, it s usually bad news. Page 37 Remember: Pressure on the budget is unrelenting and insatiable. Page 38 19

20 Budget Adoption and Adjustments Page 39 Budget Hearing and Annual Meeting Wisconsin has three types of school districts: Common Union High Unified All districts hold a budget hearing The school board must approve a proposed budget to present at the budget hearing At the budget hearing, residents have an opportunity to comment on the proposed budget Common and Union High School Districts are required to hold the budget hearing in conjunction with an annual meeting At the annual meeting, residents have the power to vote a tax This is not the final tax levy that is certified to the municipalities For unified school districts, the board has the power to vote the tax Budget hearings and annual meetings must be held between May 15 th and October 31 st Why would the levy approved at an annual meeting in July not be the final levy? Some districts are moving their budget hearings and annual meetings closer to this October 31 st date. What would be advantages and disadvantages to this practice? Page 40 20

21 How is the Original Budget Formally Adopted and Actual Levy Certified? Source: DPI website Key fall dates: 2 nd Friday in September Resident student count Summer school FTE report due at same time Revenue Limit figures October 1 Fall Equalized Value Certification Value in which the levy will be distributed October 15 Equalization Aid Certification Determines how much of your revenue limit authority will be assessed to the local taxpayer All of the figures above are needed in order to adopt an original budget and certify the levy. Page 41 Recommended Budget Format Ending Fund Balance will automatically calculate: Prior Year ending FB + Revenues Expenditures. You ll need to allocate this fund balance to the appropriate type (Unassigned, Assigned, etc.) The Budget Publication will have Audited, Unaudited and Budget figures Page 42 21

22 Importance of Budget Adoption Format Board reporting and budget adjustments If using DPI approved budget, general fund reporting and adjustments are by 2 digit function If using more detail, general fund reporting and budget adjustments reflect this level of detail This level of detail would allow for shifting budgeted funds between objects and functions in the series without board approval. This level of detail would require board approval for any shift of budget funds between locations, objects, functions and prog/proj codes. Page 43 How Are Budgets Formally Changed? Changes in amounts of appropriation and purpose must be approved by a twothirds vote of the school board. A class one notice must be published within ten days after any change is made (s (5)(a)). DPI provides a template for this as well. Page 44 22

Next Steps 2014 2015 Determine format used for budget approval Monitor and amend if necessary 2015 2016 Research and set reminders for date requirements Begin transitioning your budget in macro

23 Next Steps Determine format used for budget approval Monitor and amend if necessary Research and set reminders for date requirements Begin transitioning your budget in macro /alternate form into your financial software Recommend entering figures from alternate spreadsheets into financial software before populating the DPI worksheet Page 45 Thank You! Questions? Bob Borch CESA #1 Dr. Thomas R. Owens Stevens Point Area Public School District Debby Schufletowski Robert W. Baird & Co. Page 46 23

CEDARBURG SCHOOL DISTRICT Cedarburg, Wisconsin. Audited Financial Statements Year Ended June 30, Independent Auditors' Report 1-2

CEDARBURG SCHOOL DISTRICT Cedarburg, Wisconsin. Audited Financial Statements Year Ended June 30, Independent Auditors' Report 1-2 Audited Financial Statements Year Ended Table of Contents Page(s) Independent Auditors' Report 1-2 Management Discussion & Analysis 3-14 Basic Financial Statements Statement of Net Position 15 Statement