NO.

CITY OF IRWINDALE

ADMINISTRATIVE POLICY

SUBJECT:FUND BALANCE POLICY

PURPOSE:

To outline the policies and procedures adopted by the City Council regarding provisions for identifying and classifying fund balances in accordance with Governmental Accounting Standards Board (GASB) Statement No. 54.

BACKGROUND:

Fund balance is the difference between the assets and liabilities reported in a governmental fund. As outlined in Governmental Accounting Standards Board (GASB) Statement No. 54, there are five separate components of fund balance. Each separate component is identified by the extent to which the City is bound to honor the constraints on the specific purposes on which amounts can be spent.

  • Nonspendable fund balance (inherently unspendable)
  • Restricted fund balance (external limitations on use)
  • Committed fund balance (self-imposed limitations on use)
  • Assigned fund balance (limitation resulting from intended use)
  • Unassigned fund balance (residual net resources-no restrictions)

The first two components listed above are not addressed in this policy due to the nature of their restrictions. This policy is focused on financial reporting of previously unrestricted fund balance, or the last three components listed above. All components are further defined below.

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. Currently there are no amounts be designated as Committed Fund Balance.

Assigned Fund Balance

The City Council delegates the authority to assign fund balance to the City Manager,for intended specific purposes. The following assignments are established and may be modified by the City Manager or his/her designee as deemed appropriate. This category was previously reported as “unreserved” under the old standard:

  • General Fund Economic Contingency Reserve: The City’s General Fund balance committed for contingencies is established at a minimum of $5,000,000. This amount represents twenty-five (25) percent of the current adopted General Fund budget, or approximately 3 months of the General Fund’s operations. The current recommendation of the Government Finance Officers Association (GFOA) as a best practice is no less than two months of regular general fund operating revenues or regular general fund expenditures, with consideration given to a variety of factors, including the predictability of revenues and volatility of expenditures. With the volatility of the economy over the past few years, staff is recommending the level of this reserve be set slightly higher than the recommended minimum level. General Fund Economic Contingency Reserves shall be used only for:
  1. Emergencies (natural disasters such as fires, floods, or earthquakes or other operational emergencies) that are nonrecurring expenditures.
  2. Maintaining services in a severe fiscal crisis.
  • Continuing Appropriations: Fund balance levels must be sufficient to meet funding requirements for projects approved in prior years and which must be carried forward into the new fiscal year.
  • Capital Asset/Infrastructure Replacement: Assigned for future building, equipment and infrastructure replacement and maintenance projects as future requirements are identified.
  • Retirement Plan Stabilization: Assigned for significant unplanned increases in the Employer Contribution rates for the City’s California Public Employees’ Retirement and Public Agency Retirement System Plans.
  • Compensated Absences: Assigned for unused vacation and sick leave hours earned by City employees at the employees’ hourly rate.
  • Post-retirement benefits: Assigned to apply against the outstanding liability for retiree health benefits.
  • Capital Improvement Projects: Assigned for future capital improvement projects not specified in the annual budget and/or capital improvement plan.
  • Debt Service: Assigned to provide for future debt service obligations.

Unassigned Fund Balance

These are residual positive new resources in the General Fund in excess of what can properly be classified in one of the other four categories. The General Fund may only report a positive unassigned balance.Conversely, any governmental fund in a negative (deficit) position could report a negative amount of unassigned fund balance.

  • Surplus: Since a surplus does not represent a recurring source of revenue, it shall not be used to fund a recurring expense; however, the surplus may be appropriated for use to fund a one-time expenditure or use not already funded through an appropriation. If it is determined there is an operating surplus:
  • The City Council may appropriate funds for the following nonrecurring purposes:

a)Applied to capital improvements and purchases in the Fund. Surplus funds may be used for all capital improvements and equipment purchases that are not financed with borrowings or other contributions.

b)Eliminate unfunded liabilities related to the City’s Post-Employment Benefits. Any surplus may be transferred to reduce the unfunded liability in the pension funds, or other post employment benefits trust fund or any other fund initiated by the City to provide post employment benefits. These can be transferred and included in an already created assigned fund balance.

c)Reduction or avoidance of debt. If there is short-term debt within the fund, the surplus may be applied to reduce or eliminate the debt if determined to be advantageous for the City. If a borrowing is scheduled, the surplus may be used to reduce the principal amount the City needs to obtain if determined to be advantageous for the City.

d)Tax, fee, or rate stabilization. Surplus funds may be designated for stabilization in order to avoid raising taxes, fees, or rates related to the fund in subsequent years.

  • Deficit: If it is determined there is a deficit, the unassigned fund balance is to be restored through the following mechanisms, in order of priority:
  • Reduction of 1) assigned fund balance levels; 2) committed fund balance levels
  • Transfer of unassigned fund balances from other related funds.

FUNDS:

  • General Fund: City’s primary operating fund accounts for all financial resources of the City except those required to be accounted for in another fund.
  • Capital Projects Funds: Is established on a project length basis and is used to account for revenues and expenditures during the construction/acquisition of major capital facilities and projects. This fund is financed mainly by borrowings and contributions, and is not used to accumulate resources for future capital improvements, and therefore will not be used to build up reserves.
  • Debt Service Funds: Accounts for the accumulation of resources and payment of principal and interest of the Public Finance Authority. City will maintain sufficient reserves in its debt service funds that will equal or exceed the reserve fund balances required by bond covenants.
  • Special Revenue Funds: Are used to account for and report proceeds of specific revenues that are legally restricted or committed to expenditures for particular purposes.
  • Agency Funds: Account for the resources held by the City in a fiduciary capacity for individuals, governmental entities, and others

Fund Balance Classification:

The accounting policies of the City considers restricted fund balance to have been spent first when an expenditure is incurred for purposes 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 could be used, the City considers committed amounts to be reduced first, followed by assigned amounts and then unassigned amounts.

Annual Reporting and Periodic Review:

Annually, after the completion of the City’s Comprehensive Annual Financial Report, the Finance Director or designee shall prepare and present a Summary of Fund Balance as part of the Financial Reporting and City’s Annual Budget processes. At least every two years, the City Council will affirm or revise the Policy (usually during the budget process).

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