CC - Item 7D - FY 2010-11 Fund Balance Policy'1 �1 •
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TO: THE HONORABLE MAYOR AND CITY �OUNCIL
FROM: JEFF ALLRED, CITY MANAGER t
DATE: JUNE 28, 2011
SUBJECT: FY 2010 -11 FUND BALANCE POLICY
SUMMARY
In February 2009 the Governmental Accounting Standards Board (GASB) released
Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions,
which redefines fund balance terminology. Two considerations led to the replacement
of the previous components of fund balance:
1. The previous terminology was not self - explanatory and frequently was
misunderstood by financial statement users.
2. The previous components were often applied inconsistently in practice.
Therefore, future financial statements will substitute the terms Reserved Fund Balance,
Designated Unreserved Fund Balance and Undesignated Unreserved Fund Balance
with the terms Nonspendable Fund Balance, Restricted Fund Balance, Committed Fund
Balance, Assigned Fund Balance and Unassigned Fund Balance. However, not all of
the new terms will be seen in the FY 2010 -11 financial report.
Additionally, GASB Statement No. 54 strongly recommends that city councils formally
adopt a Fund Balance Policy. A Fund Balance Policy is the rough equivalent of a
reserve policy with additional language defining what financial conditions would lead to
a city using Committed Fund Balance (reserves), how they would be used and a plan
for replenishing them. The purpose of this report is to present a Fund Balance Policy,
including the amount of Committed Fund Balance and the implementing language
required by GASB Statement No. 54. The new requirements must be made a part of
the FY 2010 -11 financial reports.
Staff Recommendation
Staff recommends that the City Council replace the current General Fund Reserve
Policy with a Fund Balance Policy (Attachment A). Also, Committed Fund Balance is to
be equivalent to 31% of General Fund revenues ($16,296,000 x 31% = $5,051,760).
APPROVED FOR CITY COUNCIL AGENDA: ITEM NUMBER: U
City Council Meeting
July 28, 2011
Paoe 2 of 2
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Submitted by:
Steve Brisco
Director of Finance
Attachment A: Fund Balance Policy
Attachment A
CITY OF ROSEMEAD
FUND BALANCE POLICY FOR THE ROSEMEAD GENERAL, CAPITAL
PROJECTS AND EQUIPMENT REPLACEMENT FUNDS
I. PURPOSE
To establish a Fund Balance Policy for the City's General, Capital Projects,
Equipment Replacement and Technology Replacement Funds.
IL SCOPE
• As recommended by the Governmental Accounting Standards Board
(GASB) Statement No. 54, this policy sets forth the method of
calculating the City's Committed Fund Balance for the General Fund,
the conditions of when Committed Fund Balance should be used and
how it should be replenished.
• Method of calculating Capital Projects, Equipment Replacement and
Technology Replacement Funds Committed Fund Balances.
III. DEFINITION
Net Resources (fund balance or net worth)
• All related financial assets less all related financial liabilities
Nonspendable Fund Balance (inherently nonspendable)
• Portion of net resources that cannot be spent because of their form
(i.e. prepaid expenses, inventory).
• Portion of net resources that cannot be spent because they must be
maintained intact.
Restricted Fund Balance (externally enforceable limitations on use)
• Limitations imposed by creditors, grantors, contributors, or laws and
regulations of other governments.
• Limitations imposed by law through constitutional provisions or
enabling legislation.
Committed Fund Balance (self- imposed limitations set in place prior to end
of the period)
• Limitations imposed at the highest level of decision making that
requires formal action at the same level to remove.
Attachment A
Assigned Fund Balance (limitation resulting from intended use)
• Intended use established by highest level of decision making (City
Council).
• Intended use established by body designated for that purpose
(Finance Committee).
• Intended use established by official designated for that purpose
(City Manager).
Unassigned Fund Balance (residual net resources)
• Total fund balance in the General Fund in excess of nonspendable,
restricted, committed, and assigned fund balance (i.e., surplus).
• Excess of nonspendable restricted, and committed fund balance
over total fund balance (i.e. deficit).
IV. POLICY
A. General Fund Committed Fund Balance is equal to 31 % of total
General Fund estimated revenue on July 1.
B. Each year the Finance Director will review the five measurement criteria
and certify that the assumptions and methodology remain appropriate and
that 31% of General Fund estimated revenue remains a prudent rate. In
the best judgment of the Finance Director the rate may be increased. City
Council approval is required to reduce the rate and in no case shall the
rate be less than 5% of General Fund revenues.
C. The source of funding comes from General Fund Unassigned Fund
Balance and must be supported by an underlying cash equivalent equal
to the amount of the reserves.
D. Use of Committed Fund Balance requires City Council approval.
E. In the event that General Fund Committed Fund Balance is appropriated
for current operations staff must bring back to City Council a
replenishment plan no later than June 30 of the fiscal in which it was
were used.
F. The Capital Projects Fund Committed Fund Balance is to be equal to 2
percent of total annual capital expenditures at July 1.
Attachment A
G. The Equipment Replacement and Technology Replacement Funds are to
be used to purchase new and replacement equipment as appropriated in
the annual budget. Fund revenue is to be provided by charges to the
using departments in the amount of depreciation (straight line method with
no residual value) plus a 5% inflation factor.