CC - Item 4C - Adoption of Resolution No. 2021-55 Approving a Revised Fund Balance Policy for the City of RosemeadROSEMEAD CITY COUNCIL
STAFF REPORT
TO: THE HONORABLE MAYOR AND CITY COUNCIL
FROM: GLORIA MOLLEDA, CITY MANAGER 0
DATE: NOVEMBER 9, 2021
SUBJECT: ADOPTION OF RESOLUTION NO. 2021-55 APPROVING A REVISED
FUND BALANCE POLICY FOR THE CITY OF ROSEMEAD
SUMMARY
A revised Fund Balance Policy has been prepared in accordance with Governmental Accounting
Standards Board (GASB) Statement No. 54. The Policy as proposed, increases the General Fund
committed fund balance requirement from 31 % of General Fund revenue to 40% of General Fund
annual expenditures. The proposed policy also removes language referencing an closed fund,
funding requirements for the Equipment and Technology Replacement Funds and designates the
Finance Director as the position authorized to make certain fund balance assignment
determinations for reporting purposes. Designations for `Committed Fund Balance' remains with
the City Council as established by GASB 54.
DISCUSSION
The standard, as set forth by GASB 54, substantially altered the categories and terminology used
to describe the components of a fund balance. The categories and terminology reflect an approach
that focuses, not on financial resources available for appropriation within a fund, but on the extent
to which the City is bound to honor constraints on the use of the funds. Prior to GASB 54, fund
balances were classified into three separate components: Reserved, Designated, and
Undesignated. The classifications created under GASB 54 are: Nonspendable, Restricted,
Committed, Assigned, and Unassigned.
Part of the City's implementation of the GASB Statement was the approval of a fund balance
policy by the City Council on July 28, 2011. The policy explained the five components of fund
balance and set the minimum fund balance (committed balance) for the General Fund at 31 % of
revenue. The policy also gave the Finance Director authority to increase the 31 % minimum based
on certain criteria, however, this authority is restricted to the "highest level of decision making"
within an organization (the City Council). The policy did not however, identify the position
formally delegated, as required by the Statement, responsible for the assignment of fund balance
for specific purposes (assigned fund balance) for inclusion in the annual financial report. Other
provisions within the 2011 policy requires that a committed fund balance equal to two percent of
AGENDA ITEM 4.0
City Council Meeting — Adoption of Revised Fund Balance Policy
November 9, 2021
Page 2 of 2
total annual capital expenditures be set for the Capital Projects Fund and sets fund revenue
contributions for the Equipment Replacement and Technology Replacement Funds at the amount
equal to annual depreciation of equipment plus a five -percent inflation factor. Lastly, the 2011
policy was approved by minute action while the Fund Balance Policy adopted prior to the that
policy was adopted by City Council Resolution (No. 2008-01).
This revised policy presented herein changes the amount of the General Fund committed fund
balance requirement to 40% of General Fund annual expenditures. This not only increases the
amount from 31% to 40% but changes the basis from a percent of revenue to a percent of
expenditures. The 40% is based on combination of cash flow needs (25%), emergency repairs to
infrastructure caused by a disaster (10%), and revenue volatility (5%). The revised policy also
removes the fund balance requirement of the Capital Improvement Fund which was closed in
Fiscal Year 2017-18, and funding requirements for the Equipment and Technology replacement
funds which are more a component of the budget policy than the fund balance policy.
STAFF RECOMMENDATION
That the City Council adopt the Resolution No. 2021-55 approving the revised Fund Balance
Policy in Accordance with Governmental Accounting Standards Board Statement Number 54.
FISCAL IMPACT
None, although the policy does set forth obligations for growth of the General Fund committed
fund balance in future years.
PUBLIC NOTICE PROCESS
This item has been noticed through the regular agenda notification process.
Prepared by:
Paula Chamberlain, Interim Finance Director
Attachments
Resolution 2021-55
Fund Balance Policy as Exhibit A
Attachment A
Resolution No. 2021-55
RESOLUTION NO. 2021-55
A RESOLUTION OF THE CITY COUNCIL OF THE CITY OF
ROSEMEAD APPROVING THE FUND BALANCE POLICY IN
ACCORDANCE WITH GOVERNMENTAL ACCOUNTING STANDARDS
BOARD STATEMENT NO. 54
WHEREAS, the Governmental Accounting Standards Board (GASB) issued Statement
No. 54 — Fund Balance Reporting and Governmental Fund Type Definitions, which changed the
terminology used for fund balance reporting on balance sheets of Governmental Funds; and
WHEREAS, for financial statement reporting purposes, the GASB Statement defines
Restricted amounts as those that are constrained to specific purposes by their providers through
constitutional provisions or enabling legislation; and
WHEREAS, the City Council may commit General Fund balance for specific purposes by
taking formal action and these committed amounts cannot be used for any other purpose unless
the City Council removes or changes the specific use through the same formal action taken to
establish the commitment; and
WHEREAS, this policy delegates to the Finance Director the authority to assign
unrestricted (assigned or unassigned) fund balance amounts where the City's intent is for those
amounts to be used for specific purposes. This delegation of authority is for the sole purpose of
reporting these amounts in the annual financial statements; and
NOW, THEREFORE, BE IT RESOLVED by the City Council of the City of Rosemead,
California as follows:
SECTION 1. The City Council hereby approves the Fund Balance Policy for compliance
with Governmental Accounting Standards Board Statement No. 54, Fund Balance Reporting and
Governmental Fund Type definitions in substantially the form submitted and attached hereto as
Exhibit A.
policy.
SECTION 2. The City Council hereby sets the reserve level as stated within the attached
PASSED, APPROVED, AND ADOPTED this 9th day of November 2021.
Polly Low, Mayor
APPROVED AS TO FORM: ATTEST:
Rachel Richman, City Attorney Ericka Hernandez, City Clerk
STATE OF CALIFORNIA
COUNTY OF LOS ANGELES
CITY OF ROSEMEAD
I, Ericka Hernandez, City Clerk of the City Council of the City of Rosemead, California, do hereby
certify that the foregoing City Council Resolution No. 2021-55 was duly adopted by the City
Council of the City of Rosemead, California, at a regular meeting thereof held on the 9th day of
November, 2021, by the following vote, to wit:
AYES:
NOES:
ABSENT:
ABSTAIN:
Ericka Hernandez, City Clerk
Exhibit A
5 E M F
1 q City of Rosemead
AV Fund Balance Policy
* Resolution No. 2021-55
DRATEO 1Vy9
I. Purpose and Scope
The purpose of this policy is to establish a Fund Balance Policy for the City's General Fund.
This policy also establishes the procedures for reporting within the annual financial
statements, unrestricted fund balance (comprised of Committed, Assigned, and Unassigned
categories) with the City's governmental funds, and authorizes and directs the Finance
Director to prepare financial reports which accurately categorize fund balance as per
Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance
Reporting and Governmental Fund Type Definitions.
II. Obiectives
A. Comply with GASB 54 Fund Balance Reporting and Governmental Fund Type Definitions.
B. Establish sound formal fiscal reserve policies as the foundation for ensuring that strong
fiscal management and policies guide future City decisions.
C. Maintain adequate reserves. This action will provide the City with resources to help
stabilize the organization and will position it during economic downturns or large-scale
emergencies. In addition, it is critical to minimize the potential for reactive decision-
making, which can lead to unpleasant consequences.
III. Definitions
Fund balance is the difference between the assets and liabilities reported in the City's
governmental funds. There are generally limitations on the purpose for which all or a portion
of the resources of a governmental fund may be used. The force behind these limitations can
vary significantly, depending upon its source. Consequently, the fund balance reported in the
annual financial statements is categorized into five components whereby each component
identifies the extent to which the City is bound to honor constraints on the specific purpose
of which amounts in the fund can be spent. The five components of fund balance are as
follows:
• Nonspendable: The portion of a fund balance that cannot be spent because it is either:
(a) not in a spendable form, such as prepaid items, inventories of supplies, or
loans/advances receivable; or (b) legally or contractually required to be maintained intact,
such as the principal portion of an endowment. This category was traditionally reported
as a "reserved" fund balance under the old statement.
• Restricted: The portion of a fund balance that has constraints placed on the use of
resources that are either: (a) externally imposed by a creditor (such as through debt
covenants), grantors, contributors, or laws or regulations of other government agencies
or offices: or (b) imposed by law through constitutional provisions or enabling legislation.
This category was traditionally reported as a "reserved" fund balance under the old
standard.
• Committed: The portion of a fund balance that includes amounts that can only be used
for specific purposes pursuant to constraints imposed by formal action of the City Council
and remain binding unless removed in the same manner. This category was traditionally
reported as a "designated" fund balance under the old statement.
• Assigned: The portion of a fund balance that includes amounts that are constrained by
the applicable government agency's intent to be used for specific purposes, but that are
neither Restricted nor Committed. Such intent needs to be established either by the City
Council or by an official designated for that purpose. This category was traditionally
reported as a "designated" fund balance under the old standard.
• Unassigned: The portion of a fund balance that does not fall into one of the above
categories within the General Fund. 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. This category was
traditionally reported as an "undesignated" fund balance under the old standard.
IV. Policy
A. DELEGATION OF ASSIGNMENT AUTHORITY
This policy delegates to the Finance Director the authority to assign unrestricted (assigned
or unassigned) fund balance amounts where the City's intent is for those amounts to be
used for specific purposes. This delegation of authority is for the sole purpose of reporting
these amounts in the annual financial statements.
B. GENERAL FUND RESERVE POLICY
1. At the end of each fiscal year, the City shall maintain a Committed Fund Balance within
its General Fund equal to 40% of annual operating expenditures for operating cash
flow, contingencies, revenue volatility, and catastrophic events. For purpose of this
policy statement, the General Fund Budget shall include appropriations for operating
expenditures plus transfers from the General Fund to Other Funds. This 40% policy is
considered the minimum level necessary to adequately provide for:
Cash flow requirements
Economic uncertainties
Reductions or interruptions of revenue streams
Natural disasters (earthquake, flood, fire, etc.)
Financial hardships or downturns in the local or national economy
Fund Balance Policy Page 1 2
2. In addition to the designations noted above, fund balance levels will be sufficient to
meet funding requirements for ongoing services and staffing levels, projects approved
in prior years which are carried forward into the new year, debt service reserve
requirements, and other services or designations required by contractual obligations,
state law, or generally accepted accounting principles.
3. The source of funding comes from the General Fund Unassigned Fund Balance and
must be supported by an underlying cash equivalent equal to the amount of the
committed reserve.
4. This designated fund balance shall not be considered available for compensation
adjustments, or increases in staffing and/or service levels.
5. The status of the General Fund reserve balances shall be analyzed and estimated by
the Finance Department using departmental year-end estimates and reported with
the adoption of each year's budget. The actual General Fund restricted fund balance
shall be reported no less than annually in the agenda report accepting the Annual
Comprehensive Financial Report.
6. Any reserves in excess of the 40% designation shall be available for appropriation for
one-time expenditures, capital needs, or other planned use as recommended by the
City Manager and approved by the City Council.
V. GENERAL PROVISIONS
Deviations from the Policy
No deviations from the Fund Balance Policy will be allowed except as approved by the City
Council. This would include increasing or decreasing the basis of committed reserves,
expenditures from reserves for anything other than the intended use of said reserve, and
expenditures from any fund balances above the stated basis of the emergency reserves. Any
such request must be reviewed by the Finance Director for analysis of the fiscal impact. The
Finance Director will then submit the request to the City Manager with a recommendation
followed by a presentation to the City Council for action.
Replenishment of Reserves
As reserves are set in place for use of unforeseen or catastrophic events, it is possible for the
reserve to fall below the set policy amount. Should a particular reserve fall below the
anticipated reserve level as stated in this Policy, the City Manager will bring forward a plan as
part of the subsequent fiscal year budget, to replenish said reserve in a reasonable
timeframe.
This policy is in place to provide a measure of protection of the City against unforeseen
circumstances and to comply with GASB Statement No. 54. No other policy or procedure
supersedes the authority and provision of this policy.
Fund Balance Policy Page 13