Municipal Finance Officers, Clerks and Treasurers Association

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1 Municipal Finance Officers, Clerks and Treasurers Association Larry Finney Greene, Finney & Horton, LLP October, 2009

Effective for periods beginning after June 15, 2010 Retroactive application encouraged for statistics of CAFR (if don t then explanation is needed) This

2 Effective for periods beginning after June 15, 2010 Retroactive application encouraged for statistics of CAFR (if don t then explanation is needed) This standard has not changed the total amount reported as fund balance, but has significantly changed the terminology and categories used as components of fund balance

Governmental-wide, proprietary fund and fiduciary financials show all assets and liabilities; difference is net assets Governmental funds only show a

3 Governmental-wide, proprietary fund and fiduciary financials show all assets and liabilities; difference is net assets Governmental funds only show a subset of assets and liabilities; the difference is really more a liquidity measurement than a net worth measurement, so we use the term FUND BALANCE

4 Some portions of fund balance are limited in how they can be used and some can be used however the government decides, so we must distinguish Reservations, designations and unreserved portions of fund balance are gone-they are evil and are being destroyed!

5 But new heroes are becoming victorious! Nonspendable Restricted Committed Assigned Unassigned

6 There are some differences between fund balance and liquidity because some assets reported in the governmental funds inherently cannot be spent-this is the UNSPENDABLE portion of fund balance Assets that will never be converted to cash (i.e. prepaids and inventories) Assets that will not convert to cash soon enough to affect the current period (i.e. long-term portion of receivables and the nonfinancial assets held for resale such as land)

7 UNSPENDABLE portion of fund balance Resources that must be maintained intact based on legal or contractual requirements (i.e. principal of an endowment or the capital of a revolving loan fund)

8 If resources are limited in how they can be spent due to externally enforceable legal restrictions, they roll into fund balance as RESTRICTED Other governments through laws and regulations Grantors or contributors through agreements Creditors through debt covenants or other contracts Enabling legislation that limits how a revenue can be used (i.e. gas tax for roads)

9 RESTRICTED fund balance If amounts collected from the long-term portion of receivables or from other long-term assets held for sale are also limited externally in how they can be spent, they would be shown as restricted instead of nonspendable

10 If the governing body limits the use of fund balance and that limitation can only be removed by that same governing body, those fund balance resources are considered COMMITTED The action to commit the resources must be taken by the end of the reporting period Note that resources accumulated as stabilization funds are sometimes reported in this category

11 COMMITTED fund balance If amounts collected from the long-term portion of receivables or from other long-term assets held for sale are also limited internally, they would be shown as committed instead of nonspendable

12 If a government has intentions for certain resources, but they are not committed through formal governing body action, those resources are considered ASSIGNED fund balance Assigned fund balance does NOT have to come from the governing body Assigned fund balance does NOT have to have formal action to be considered assigned

13 Amounts in excess of nonspendable, restricted and committed fund balance in funds other than general fund automatically will be reported as assigned fund balance If amounts collected from the long-term portion of receivables or from other longterm assets held for sale are limited in this manner, they would be shown as assigned instead of nonspendable

14 Amounts in assigned fund balance can never cause unassigned fund balance to be a deficit This is the category used to reflect the portion of existing fund balance that is planned to be used to eliminate a projected deficit in the subsequent year s budget

15 Encumbrances If liquidation is expected from restricted or committed resources, then already shown in that category Otherwise, they are assigned

16 If general fund has net resources in excess of the other four categories that surplus is considered UNASSIGNED Only general fund can have a positive unassigned fund balance Can any fund have a negative unassigned fund balance?

17 Flow Assumption More restrictive and then move down to less restrictive

18 Fund balance policy is an internal understanding at the governing body level that maintaining a minimum liquid financial cushion is important enough to establish a formal policy Stabilization funds are rainy day funds that are set aside for contingencies, emergencies and to provide a financial cushion in a less formal way

19 A fund balance policy only applies to resources that a governing body truly has control over how they can be used So which categories of fund balance does governing body truly control?

20 A fund balance policy should at least include A reasonable minimum level of unrestricted fund balance to be maintained in the general fund How unrestricted fund balance can be used How unrestricted fund balance will be replenished when it is below the minimum level

21 So what is a proper minimum level of unrestricted fund balance to establish in a policy or in stabilization funds?

22 Factors to consider: Size of government Speed of growth of government Potential frequency of natural disasters Heavy reliance on small number of resource providers Disparities in timing between cash receipts and cash disbursements Potential volatility of cash receipts

23 Governmental Funds General (New GASB 54 definition) Primary operating fund account for all financial resources except those to be accounted for in another fund required has been removed How many?

24 Governmental Funds Special revenue (new GASB 54 definition) account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects legally restricted has been removed It is okay to use other resources (transfers, etc.) as long as core revenue is substantial portion of the in flows Permitted but not required How many?

25 Governmental Funds Debt service/permanent funds No substantial change

26 Governmental Funds Capital projects (new GASB 54 definition) account for and report financial resources that are restricted, committed or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets How many?

27 Various new requirements primarily regarding the new terms and definitions Encumbrances by major fund and then in the aggregate for nonmajor funds

Education is going to be crucial May need to rethink your fund balance policy If you don t have a policy, may be even more important now to ensure there is agreement of how much is truly

28 Education is going to be crucial May need to rethink your fund balance policy If you don t have a policy, may be even more important now to ensure there is agreement of how much is truly reasonable for unassigned fund balance Look at your different items in fund balance early to make sure you know-if don t know, then have time to talk to auditors and explain to councils and management

GASB Statement No. 54

Frank J. Champi, CPA, Principal Susan R. Johnson, CPA, Principal February 22, 2010 GASB Statement No. 54 Fund Balance Reporting and Government Fund Type Definitions iti Scope Changes how fund balance is