Fund Balance Policy
The Fund Balance Policy is intended to provide guidelines during the preparation and execution of the annual budget to ensure that sufficient reserves are maintained for unanticipated expenditures or revenue shortfalls. It also is intended to preserve flexibility throughout the fiscal year to make adjustments in funding for programs approved in connection with the annual budget. The Fund Balance Policy should be established based upon a long-term perspective recognizing that stated thresholds are considered minimum balances. The main objective of establishing and maintaining a Fund Balance Policy is for the City to be in a strong fiscal position that will allow for better position to weather negative economic trends.
The Fund Balance consists of five categories: Nonspendable, Restricted, Committed, Assigned, and Unassigned.
- Nonspendable Fund Balance consists of funds that cannot be spent due to their form (e.g. inventories and prepaids) or funds that legally or contractually must be maintained intact.
- Restricted Fund Balance consists of funds that are mandated for a specific purpose by external parties, constitutional provisions or enabling legislation.
- Committed Fund Balance consists of funds that are set aside for a specific purpose by the city’s highest level of decision making authority (council). Formal action must be taken prior to the end of the fiscal year. The same formal action must be taken to remove or change the limitations placed on the funds.
- Assigned Fund Balance consists of funds that are set aside with the intent to be used for a specific purpose by the city’s highest level of decision making authority or a body or official that has been given the authority to assign funds. Assigned funds cannot cause a deficit in unassigned fund balance.
- Unassigned Fund Balance consists of excess funds that have not be classified in the previous four categories. All funds in this category are considered spendable resources. This category also provides the resources necessary to meet unexpected expenditures and revenue shortfalls.
Nonspendable and Restricted Funds
Nonspendable funds are those funds that cannot be spent because they are either:
1) Not in spendable form (e.g. inventories and prepaids)
2) Legally or contractually required to be maintained intact
It is the responsibility of the Finance Director to report all Nonspendable Funds appropriately in the City’s Financial Statements.
Restricted funds are those funds that have constraints placed on their use either:
1) Externally by creditors, grantors, contributors, or laws or regulations or other governments
2) By law through constitutional provisions or enabling legislation.
It is the responsibility of the Finance Director to report all Restricted Funds appropriately in the City’s Financial Statements. All Restricted Funds must also be reported to the City’s governing body within two months of the end of the fiscal year.
Order of Use of Restricted and Unrestricted Funds
When both restricted and unrestricted funds are available for expenditure, restricted funds should be spent first unless legal requirements disallow it.
When committed, assigned and unassigned funds are available for expenditure, committed funds should be spent first, assigned funds second, and unassigned funds last.
Authority to Commit Funds
The City’s governing body has the authority to set aside funds for a specific purpose. Any funds set aside as Committed Fund Balance requires the passage of a resolution by a simple majority vote. The passage of a resolution must take place prior to June 30th of the applicable fiscal year. If the actual amount of the commitment is not available by June 30th, the resolution must state the process or formula necessary to calculate the actual amount as soon as information is available.
Maintaining a Financial Stabilization Account is a necessity for sound financial management and fiscal accountability. The City’s governing body has the authority to establish a Financial Stabilization Account that will be a Committed Fund Balance. A Financial Stabilization Account is established for the purpose of providing funds for an urgent event that affects the safety of the general public (e.g. flood, tornado, etc.).The minimum level for the Financial Stabilization Account is 5% of General Fund expenditures. The recognition of an urgent event must be established by the governing body or their designee (e.g. Chief Administrative Officer). If established by the governing body’s designee, the specific urgent event must be reported to the governing body at their next meeting. A budget amendment must be approved by the City’s governing body. In the event that the balance drops below the established minimum level, the City’s governing body will develop a plan to replenish the Financial Stabilization Account balance to the established minimum level within four years.
Authority to Assign Funds
Upon passage of the Fund Balance Policy, authority is given to the City’s Finance Director to assign funds for specific purposes in an amount not to exceed $20,000 per purpose or in total not to exceed $200,000. Any funds set aside as Assigned Fund Balance must be reported to the City’s governing body at their next regular meeting and recorded in the minutes. The governing body has the authority to remove or change the assignment of the funds with a simple majority vote.
The City’s governing body has the authority to set aside funds for the intended use of a specific purpose. Any funds set aside as Assigned Fund Balance requires a simple majority vote and must be recorded in the minutes. The same action is required to change or remove the assignment.
Upon passage of a budget ordinance where fund balance is used as a source to balance the budget, the Finance Director shall record the amount as Assigned Fund Balance.
Unassigned Fund Balance
Unassigned Fund Balance is the residual amount of Fund Balance in the General Fund. It represents the resources available for future spending. An appropriate level of Unassigned Fund Balance should be maintained in the General Fund in order to cover unexpected expenditures and revenue shortfalls.
Unassigned Fund Balance may be accessed in the event of unexpected expenditures up to the minimum established level upon approval of a budget amendment by the City’s governing body. In the event of projected revenue shortfalls, it is the responsibility of the Finance Director to report the projections to the City’s governing body on a quarterly basis and shall be recorded in the minutes.
Any budget amendment that will result in the Unassigned Fund Balance dropping below the minimum level will require the approval of 2/3 vote of the City’s governing body.
The Fund Balance Policy establishes a minimum Unassigned Fund Balance equal to 25% of General Fund expenditures. In the event that the balance drops below the established minimum level, the City’s governing body will develop a plan to replenish the fund balance to the established minimum level within two years.