Governmental accounting has evolved formally for many years. The Governmental Finance Officers Association (GFOA) was founded in 1906 to actively support the advancement of governmental accounting, auditing and financial reporting. However, it was not until 1934 that GFOA established the National Committee on Municipal Accounting (NCMA), which began to promulgate accounting standards for governments.

In 1951, the National Committee on Governmental Accounting (NCGA), the successor body to the NCMA, issued Bulletin No. 14, Municipal Accounting and Auditing. This statement of governmental accounting standards found widespread acceptance and gave rise to the publication in 1968 by the GFOA of the first “blue book,” which provided authoritative guidance in generally accepted governmental accounting principles.

Accounting standards for private industry are set by the Financial Accounting Standards Board (FASB) and embraced by the American Institute of Certified Public Accountants (AICPA). When the AICPA issued its industry audit guide for governments in 1974, users found that some provisions were contrary to those set out by the GFOA’s “blue book.” In order to resolve these differences, in 1979 the NCGA issued its Statement 1 entitled Governmental Accounting and Financial Reporting Principles, which led to the uniform acceptance of Statement 1 as authoritative guidance for governmental or fund accounting.

The “blue book” has been revised several times and re-issued by the GFOA as Governmental Accounting, Auditing and Financial Reporting. It is now considered a non-authoritative guide for practitioners. However, it now describes how best to implement authoritative guidance.

The current authoritative body of governmental accounting is the Governmental Accounting Standards Board (GASB). This accounting and financial reporting standard-setting body was established in June 1984.

To understand the procedures for accounting for capital assets in government, one should first understand the model used for the general fund and the different model used for enterprise funds.

The traditional model of governmental accounting is based on two concepts: the measurement focus and the basis of accounting. Notes to financial statements in all governmental audits detail these two concepts as they apply to the government unit being audited.

The general fund operating statement measures the flow of the government’s current financial resources. Revenues in the form of taxes, fees and charges for services are recognized because they increase resources available for the budget year. Expenditure transactions are recognized on the operating statement because they decrease current financial resources available for spending in the budget year.

In the general fund, the focus is on current year revenues (resources) used to provide services through current year expenditures. This measurement focus is called the “current financial resources” focus simply because it recognizes transactions that increase or decrease the resources available for spending during the budget year. The general fund budget is based on this model.

In contrast to the current financial resources measurement focus, there is an economic resources measurement focus model that is used with enterprise funds. It is similar to the model used in private sector businesses. Examples of enterprise funds include water and sewer funds, natural gas funds and solid waste funds. These funds are not as concerned with available resources as they are with changes in net position (total assets minus total liabilities). Operating statements for these funds recognize transactions that increase or decrease the funds’ total economic resources during the fiscal year.

This boils down to some significant accounting differences between the annual operating statements (income statements) produced by the two measurement focus models. The economic resources measurement focus model for enterprise funds does not report the issuance of debt in its operating statement. When debt (liability) is issued, an offsetting cash (asset) amount is received resulting in no change to net assets. With the current financial resources measurement focus of the general fund, the issuance of debt increases current resources available and, therefore, is recorded on the operating statement as an Other Financing Source.

Principal debt repayment is not shown on the operating statement of the enterprise fund. The principal portion of debt repayment does not change net positon because the reduction in the amount of outstanding debt (liability) is offset by a reduction in cash (asset). In the general fund, a principal repayment is a decrease in current financial resources (decrease in assets) and is shown as an expenditure on the operating statement.

Spending for capital items does not change net position because cash is reduced (or debt is incurred) while another asset is increased by an offsetting amount. Hence, there is no recognition in the enterprise fund operating statement for acquiring assets. However, the same expenditure in the general fund is a reduction in cash (current resource) and is recognized in the general fund operating statement as an expenditure.

Depreciation is used to measure the degree to which an asset is used up over time and is shown on the operating statement of the enterprise fund. It is a non-cash expense derived by dividing the cost of an asset by its anticipated length of service. Depreciation does not affect the current financial resources of the general fund and, therefore, is not shown on its operating statement.

Now, under GASB 34, there are two financial presentations of the general fund in the annual financial report (audit), two balance sheets and two income statements. The difference in the two methods is reflected in the method of accounting for long-term assets and liabilities. Prior to GASB 34, under the general fund model all long-term assets were maintained “off the books” in something called a “general fixed asset account group.” Likewise, long-term liabilities were recorded in a separate account group called “general long-term debt account group.” These account groups were custodial in nature and not part of the audited financial statements.

Under  GASB 34, a new government-wide financial report was created to convert the general fund current resources measurement to the economic resources measurement. Basically, this means adding the long-term assets and liabilities of the local government to the current items, thereby creating new financial reports.

Since the traditional general fund current financial resources focus records only current revenues and expenditures, the balance sheet for these government funds does not include a provision for long-term assets or liabilities.

General fund expenditures for land, equipment, roads, buildings, and infrastructure are recorded simply as “capital outlay” expenditures. This is in agreement with the budget process. Conversely, payments for these items in an enterprise fund would be capitalized as land, equipment or other capital assets.

Under GASB 34, local governments now capture capital outlays in the capital asset accounting system (CAAS). This is not a fund, nor is it the old and very limited general fixed asset account group. It is a permanent addition to the financial records that enables tracking of capital assets. This long- term data is used in the government-wide financial reports.

Having two completely different financial statements for the general fund is confusing. A reconciliation must be included in the financial statements that shows how the governmental reports are related to the government-wide statements of net position and statement of activities.

There are two types, or bases, of accounting: cash and accrual. The cash basis is used by individuals and small businesses. Cash accounting records only cash in and cash out. It is limited in that some financial events would not show up under cash basis accounting. Tennessee cities and utilities use accrual accounting of which there are two types: accrual and modified accrual.

At the fund level of reporting, the general fund uses the modified accrual basis method of accounting. The “modification” is primarily in the recognition of revenue. It’s all about the budget at the general fund level, and only money available during the budget year can be booked as revenue.

General fund revenues are recognized only when they are available to liquidate liabilities of the budget year. Expenditures should be recognized in the accounting period in which the liability is incurred. The main reason for this is that most city budgets are balanced with property taxes. It is very important to tie the property tax rate to the service being provided during the budget year.

The private sector, enterprise funds, and the government-wide financial reports use the accrual basis of accounting. Revenues are recognized when they are earned and measurable, and expenses are recognized when a liability is incurred. Because enterprise fund revenue is generated from users (not taxes), there is an implicit understanding that rates will increase as necessary.

Adequate capital asset records must provide:

• A simple method of positively identifying each piece of equipment; and
• A method of accounting for each piece (or group) of property.

The records system should be simple and flexible, yet it also must provide essential information to protect city property. The capital asset accounting system should place responsibility for custody and proper use of a distinct capital asset with a specific individual.

Another benefit derived from a CAAS includes providing a centralized source of information, such as price, source of supply, maintenance costs (optional), useful life, annual depreciation, assigned department, location and anything else necessary for accountability. This captures warranty information, helps determine the amount of property insurance needed and forms the basis of cost accounting records. The CAAS must provide detailed and summarized information for inclusion in the city’s financial report by department and by fund.

To be classified as a capital asset, a specific item must have a life longer than one year and have significant value.

What constitutes significant value varies depending on the size of the city and the class of capital asset. The threshold for capitalization can vary among types of capital assets. A city may classify equipment costing more than $1,000 as capital while using a $5,000 minimum limit for buildings. Your threshold could be set at the limit at which bids are required before purchase. Cities may exercise the option to include as a capital asset any borderline items over which it wishes to maintain accounting control. Groups of items that may not qualify individually can be capitalized when the total purchase exceeds your threshold.

The municipal governing body should set the capitalization threshold for all classes of capital assets via resolution or ordinance.

A cost test may be applied to aggregates of units of similar type or purpose rather than to the unit itself. Whether an expenditure is classified as an operating expense or capitalized often is determined by its relationship to some existing asset. The amounts specified above are rather arbitrary. Your city could establish threshold values for capital asset accounting different than those suggested.

The following classifications for capital assets are recommended for purposes of accounting and financial statement presentation:

• Land includes investment in real estate other than structures, improvements and land acquired and used for street and road purposes. All land, as defined above, should be capitalized without regard to significant value. Include legal and surveying fees, damage payments and site preparation costs, including removal of old buildings, etc. Receipts from the sale of salvage should be credited against the land cost.
• Building includes costs incurred directly to put the building into its intended state of use, including construction or purchase price, architects’ fees, accident or injury costs, payments for damage and insurance during construction. The costs should be reduced for discounts, insurance recoveries and other credits.
• Improvements Other than Buildings are costs incurred directly to place the improvement into its intended state of use. It includes storage tanks, parking areas, landscaping, connector driveways, traffic lights, parking meters, and other improvements.
• Equipment includes moveable personal property such as furniture, machines, tools and vehicles. The price should include the total purchase cost before any trade-in allowance minus any discounts. It also should include other costs required to place the equipment in its intended state of operation, such as dealer add-ons or modifications.
• Infrastructure Assets include roads, bridges and tunnels. Before GASB 34, these items were not considered capital assets. During implementation of GASB 34, many cities were required to capitalize major infrastructure items acquired since 1980. Other cities picked up infrastructure assets prospectively. Infrastructure assets are classified into networks and subsystems of networks. For example, city streets may be classed as a network, while bridges would be a subsystem.
• Construction Work in Progress represents a temporary accumulation of labor, materials, equipment and overhead costs (excluding administrative overhead) of a construction project. Upon completion of the work, the total cost is transferred to one or more of the above classes of capital assets.
• Intangibles include costs incurred to acquire assets such as patents, trademarks, water rights, road easements, timber rights and computer software. GASB Statement No. 51 had a phase-in similar to GASB 34. Phase 1 and 2 cities must go back to 1981 and pick up intangible assets that were internally generated and those that have a definite life due to contractual or legal limitations. Intangible assets with an indefinite useful life may be retroactively reported. Phase 3 cities do not have to retroactively report any intangible asset.

In most small and medium-size cities, establishing a CAAS is not a major undertaking. However, planning, direction and cooperation are needed to achieve satisfactory results.

The following steps are suggested to establish the initial capital asset record:

• Assign one responsible individual the task and authority for establishing capital asset records.
• Take an initial physical inventory to collect all essential information. Description, assigned department, location, model number, serial number, manufacturer, size, and capacity are a few of the suggested identifying characteristics of each asset.
• Establish a value for all capital assets. Use historical cost records if available, or estimate value. Documentation is important.
• Complete and file an individual property record card or computer file on each capital asset.
• Label or tag capital assets. Adhesive metal tags or labels are convenient for marking each asset.

Sample forms below.

The Municipal Finance Officer Certification and Education Act of 2007 require each municipality to have in its employ at least one certified municipal finance officer (CMFO) or employ a qualified exempt individual who meets the exemption criteria set forth in the law.

A municipality with $500,000 or less in gross revenues for all funds, including utilities but excluding one- time, non-recurring grants, and with debt totaling $500,000 or less in the immediately preceding fiscal year may designate a city employee as the individual who has financial oversight over city operations. That employee must earn at least 24 hours of continuing professional education which complies with CMFO guidelines each calendar year. The municipality should designate an employee who has knowledge of day to day operations or hire a CMFO or qualified individual who is exempt from CMFO education and certification.

MTAS, in conjunction with the comptroller, develops the curriculum and provides the training and testing leading to the CMFO designation. The program includes at least 80 hours of course and lab work in government environment, auditing and internal controls, government accounting, budgeting, debt administration, cash and investment management, strategic planning and capital improvement plans, pensions and benefits administration and risk management, and procurement and enterprise resource planning systems.

A candidate must be at least 18 years of age and a high school graduate or the equivalent to apply for the CMFO designation. A candidate shall not have been convicted of any felony or any lesser crime involving theft, fraud, or other crimes of dishonesty under the laws of this state, the United States, or any other state or county if the acts involved would have been considered a crime under those laws. The candidate shall not engage in any conduct reflecting adversely upon the candidate's fitness to perform services while certified as a CMFO. Each candidate must demonstrate proficiency in the subject matter for each course to receive the designation. A candidate may choose to take the examination instead of attending a class except for the course on government environment, which is mandatory.

To maintain certification, a CMFO, must earn at least 24 continuing professional education (CPEs) hours per year, at least 16 must be classified as financial per CMFO categories. Up to 24 CPEs may be carried over per year. Other designated financial oversight employees must also abide by these CPE rules and all individuals must file electronic reports with the Comptroller's Office annually.

The following individuals are exempt from the requirements leading to the CMFO designation, but must comply with CPE requirements:

• An individual designated as a certified government finance manager (CGFM) by the Association of Government Accountants.
• An individual designated as a certified public finance officer (CPFO) by the Government Finance Officers Association.
• An individual licensed as a certified public accountant (CPA) by the state board of accountancy and in active status and who has a minimum of five years of primarily governmental experience with at least three of those years in Tennessee.

An individual working as a municipal finance officer with financial oversight not meeting the exemption requirements may submit to the comptroller of the treasury a request for exemption from the CMFO educational requirements.

All these individuals must send proof of exemption to the comptroller.

When a municipality must replace a CMFO, the person hired must be exempt or must achieve the designation within two years of being hired.

A municipality that contumaciously refuses to comply with the requirement that it have a CMFO in its employ is subject to a penalty of up to a 15% reduction in annual state sales tax revenue. Any revenue withheld will be held in reserve at the department of revenue. Upon compliance the funds will be returned to the municipality. T.C.A. §§ 6-56-401, et seq.

No definition is given for the terms ‘oversight responsibilities’ or ‘financial oversight’ in the law. This narrative is to assist cities in determining and defining what is needed and expected from a CMFO employed either full-time or part-time. If a CMFO works for more than one city they must be bonded by EACH city. It is important to note the governing body has the responsibility to set exactly what they will require from the CMFO, and this narrative is intended to note minimum financial procedures that should be implemented by any city and overseen by the CMFO. The individual taking responsibility for financial oversight must be comfortable they are performing enough work to take responsibility for the city’s financial condition and activities.

In 1994, Chapter 648 of Public Acts of 1994 added a law that required municipal clerks and recorders to become certified by completing 100 hours of education. The legislation also required that the certification be maintained by obtaining 18 hours of continuing education every three years. This law can be found in Tennessee Code Annotated (T.C.A.) § 6-54-120, and the accompanying regulations can be found in the Secretary of State’s Rules and Regulations 1360-06-01.

Who Must Comply?
Any municipality with a population of 1,500 or greater (according to the 1990 or any subsequent federal census) that employs an officer or employee responsible for the duties of a municipal clerk or recorder -- taking and preserving minutes, serving as custodian of records, providing and certifying copies, etc. -- must have at least one certified person. Of course, a municipality may have more than one certified clerk or recorder. All such employees who were serving when the law went into effect had until July 1, 1998, to become certified. Any clerk or recorder hired after the law went into effect must become certified within four years.

Are There Any Exceptions?
The exceptions are:

• Any clerk or recorder in a municipality of less than 1,500 population;
• Any municipal clerk or recorder who is licensed (and required to maintain the license) to practice law in the state of Tennessee;
• Any municipal clerk or recorder who is a certified public accountant with a current certificate issued by the state board of accountancy in Tennessee; and
• Any appointed city manager or administrator who possesses a Master of Arts degree in public administration.

Also exempt from the initial requirement is any person who has served as both a city judge and city recorder for at least 25 years. Notwithstanding these exceptions, any city or town may, by ordinance, require the clerk or recorder to obtain certification, even if it is exempted under the population requirements (fewer than 1,500 residents).

What Does It Take to Become Certified?
To be certified, a person must either obtain a certificate from the International Institute of Municipal Clerks (IIMC) or complete a minimum of 100 credit hours of applicable education.

What Does It Take to Retain Certification?
Those who are already certified must attend a minimum of 18 hours of continuing education courses every three years.

How Do I Earn the Credit Hours?

• Receive 25 credit hours toward initial certification if you have an Associate of Arts or Associate of Science degree.
• Receive 50 hours toward initial certification if you have a Bachelor of Arts or Bachelor of Science degree. (You can receive the 50 hours credit only one time, even if you hold more than one degree.)
• Attend the Certified Municipal Clerk Institute that is coordinated by the Tennessee Association of Municipal Clerks and Recorders (TAMCAR). The institute lasts two and one-half days and will give you 17.5 credit hours. Institutes are offered each spring and fall, and institute scholarships are available when local funding limitations or policies might otherwise prevent participation.
• Attend the Academy for Advanced Education that is coordinated by TAMCAR. The academy is offered each fall in conjunction with the Institute, and academy scholarships are available when local funding limitations or policies might otherwise prevent participation.
• Attend the International Institute of Municipal Clerks annual conference that is held every year in May.
• Attend Municipal Administration Program training classes offered by the University of Tennessee’s Municipal Technical Advisory Service (MTAS) and receive four hours credit per half-day class. A different course is offered each month except June and December in locations across the state.
• Attend Certified Municipal Finance Officer classes.
• Attend seminars conducted by the TML and Tennessee Municipal League Risk Management Pool.
• Attend the Local Government Leadership Program offered by the University of Tennessee’s Institute for Public Service (IPS) and receive 12 hours credit for the three-day program.
• Attend job-related seminars offered by private organizations. (Credit hours may vary.)
• Complete online self-teaching computer programs as approved by the secretary of state. (Credit hours may vary.)

How Do I Apply for Credit Hours?
Whether you are applying for the initial certificate or continuing education credits, you should contact the Division of Business Services for an application. Request form number SS-4507, appropriately titled "Application for Certification of Municipal Clerks and Recorders and Continuing Education Credit." The application is also available at https://www.sos.tn.gov/products/business-services/municipal-clerk-and-recorders-certification-and-continuing-education [1]. You can reach the division at:

312 Rosa L. Parks Avenue
6th Floor, Snodgrass Tower
Nashville, TN 37243-1102
Phone: (615) 741-3699
Fax: (615) 741-7310
E-mail: business.services@tn.gov [2]

For more information contact your MTAS municipal management consultant or:

International Institute of Municipal Clerks
8331 Utica Avenue, Suite 200
Rancho Cucamonga, CA 91730
Phone: (909) 944-4162 or (800) 251-1639
Fax: (909) 944-8545
E-mail: hq@iimc.com [3]
Website: http://www.iimc.com [4]

Municipal Technical Advisory Service
Dana Deem, TAMCAR Institute Director
226 Capitol Boulevard, Suite 606
Nashville, TN 37219-1804
Phone: (615) 532-2588
Fax: (615) 532-4963
E-mail: dana.deem@tennessee.edu [5]
Website: http://www.mtas.tennessee.edu [6]

Tennessee Association of Municipal Clerks and Recorders (TAMCAR)
Website: http://www.tamcar.org [7]

Governmental accounting standards now require the reporting of five classifications of fund balance.

Non-spendable
This classification of fund balance includes amounts that due to their nature cannot be spent, i.e. inventory. Amounts that legally or contractually cannot be spent also are required to be classified as non-spendable. An example might include the corpus or principal in a permanent fund that is legally required to remain intact.

Restricted
Amounts required to be classified as restricted result from restrictions placed on their use by:

• Imposed by law through constitutional provisions or enabling legislation.
• External enforceable legal restrictions that are imposed by creditors, grantors, contributors, or laws and regulations of other governments.

Examples of restricted fund balance amounts include unspent grant funds, debt covenants and gasoline tax revenue for street purposes.

Committed
Amounts defined as committed arise from self-imposed constraints put on the use of the funds by the government’s highest level of authority, which is the governing body. The commitment must be made by the highest formal action (ordinance) and the action must be taken before the end of the fiscal year. An example might include the passing of an ordinance to commit $20,000 for upgrading the city’s computer system.

Assigned
Amounts defined as assigned arise from intentions of the government to use the funds for a specific purpose. This action may be taken by the highest level of authority or a designated body (committee) or an individual (city manager or mayor). Assignment of fund balance is a less formal action than required for committed funds and the action may be taken after the end of the fiscal year.

Unassigned
The amounts in the unassigned fund balance classification represent those funds that are left for spending after funds earmarked for specified purposes have been otherwise classified. The General Fund is the only fund that will record a positive unassigned fund balance. The nature of other fund types automatically makes those resources restricted, committed or assigned. The only situation where other types of funds would report amounts in the unassigned fund balance category is if the balance is negative. This might occur if the fund spends more resources than it has available in restricted, committed or assigned fund balance.

Note: the term “unrestricted fund balance” used in publications refers collectively to the three categories of committed, assigned and unassigned.

The GASB statement 54 requires that governments report certain policies and procedures in the footnotes to the audited financial statements. Does this mean cities have to adopt a formal fund balance policy? No, but adopting a fund balance policy is a good idea and is viewed favorably by credit rating agencies. Regardless of whether governments adopt a formal fund balance policy the following information must be included in the audited financial statements:

1. For committed fund balance:

a. What is the government’s highest level of decision-making authority, i.e. full board?
b. What is the formal action required to the taken to commit resources, i.e. an ordinance.

2. For assigned fund balance:

a. The body (committee) or individual (mayor, city manager or finance director) authorized to assign resources for a specific purpose.
b. The policy established by the governing body that gives that authorization.

3. What order will fund balances be utilized?

a.The government must state whether restricted or unrestricted resources will be used when expenditures are incurred where either may be used.
b. Disclosure must also be made regarding whether committed, assigned and unassigned fund balances are considered to be used when the expenditure incurred is for the purpose of those classifications.

4. The purpose of each special revenue fund, identifying each specific revenue stream that is committed or restricted.

5. Detail of the nature of the non-spendable, restricted, committed or assigned fund balance amounts if not presented on the face of the balance sheet.

When developing a fund balance policy certain elements should be considered. The policy should include the above required disclosures as detailed in items 1-3, the minimum unrestricted fund balance requirement for the general fund and the policy for use and replenishment of stabilization (rainy day) fund resources if the government has one. The Government Finance Officers Association recommends that governments keep at least two months of operating revenues or expenditures in the general fund balance. Maintaining a comfortable cushion is crucial to good financial management because it helps governments compensate for unexpected events. Following is a link to the GFOA best practice on fund balance guidelines: http://www.gfoa.org/fund-balance-guidelines-general-fund [8]

The definitions of special revenue, capital projects and debt services funds were changed or clarified in this accounting standard. A special revenue fund can only be used if a significant amount of revenue supporting the activities is restricted or committed for that specific purpose (other than debt service or capital projects). Restrictions must be imposed by an external source such as the state or federal government. A common example is the state street aid fund, which is supported by revenues restricted by state law to be spent on specific street-related expenditures. The restricted source of revenue has to be considered a substantial source of revenue for the fund. A committed revenue source would be one that the full governing board has passed a resolution committing that stream of revenue for a specific purpose and that constitutes a substantial funding source of the fund.

Capital projects funds may include expenditures for general capital purchases. In the past capital projects funds have been used primarily for major construction projects. Only general fund capital projects should be accounted for in capital project funds, any capital projects done proprietary funds (i.e. utilities funds) should be accounted for in their respective funds.

Debt service funds are to be used when legally required or when resources are being accumulated to pay for principal and interest on long-term debt. This is simply a clarification from previous standards.

Practical Suggestions
Fund Types
Some special revenue funds currently established by governments may not meet the definition of a special revenue fund under GASB 54. Tennessee law currently requires that solid waste operations be accounted for in either a special revenue fund or if an operating landfill or incinerator in a proprietary fund. Fees charged for solid waste services are not considered restricted and are not committed unless the governing body adopts a resolution committing its use for only solid waste purposes. Any existing special revenue fund that does not meet the new definition must be combined into the general fund at the end of the fiscal year for reporting purposes. In other words, governments should continue to account for solid waste operations in a separate fund during the year. The Comptroller of The Treasury, Division of Local Government Audit issued the following guidance:

“The activities being accounted for in a proprietary fund are not impacted. However, activities being accounted for in special revenue funds will be affected. Solid waste activities will not meet the criteria for being reported in a special revenue fund. To bridge the gap, the accounting records will still account for solid waste activities as they have in the past. However, for financial reporting purposes, the activities will be rolled into the general fund. A supplemental schedule should be created to reflect the activities to demonstrate compliance with T.C.A.”

The complete directive from Division of Local Government Audit can be found in the Audit Manual, www.comptroller.tn.gov/la/AuditManual.asp [9]

Classifying fund balances for compilance  with this standard requires governments to assess decisions made throughout the year regarding how resources are intended to be spent. Some of the steps necessary to properly classify fund balances include:

• Determine if the government has non-spendable assets such as inventory, pre-paid expenditures or long-term receivables (due from other funds) that should be classified.
• Locate any resolution or ordinance that earmarks a specific revenue stream or available resources for a specified purpose.
• Identify any restrictions placed on resources by external parties such as debt covenants and state or federal law.
• Document if authority has been given to a committee or individual to assign resources and create a list of assignments made by those parties.

T.C.A. § 9-3-401 et seq., known as the Local Government Modernization Act of 2005, requires that local government accounting and reporting comply with generally accepted accounting principles. Penalties or restrictions may be assessed at the discretion of the comptroller’s office for noncompliance with the act. What this means for governments is they must follow accounting standards established by the Governmental Accounting Standards Board (GASB). In order to record the new fund balances in the internal accounting system new account numbers must be established. Depending on the type of software used in each government this may have to be done with assistance from software vendors. MTAS recommends that governments consult with their software vendors and independent auditors prior to making any adjustments to fund balance in the accounting system. It may be necessary to create a separate spreadsheet or file to reclassify fund balances and maintain supporting documentation for your classification decisions and make the fund balance adjustments at year end.

Model General Fund 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: Non-spendable, Restricted, Committed, Assigned, and Unassigned.

• Non-spendable Fund Balance consists of funds that cannot be spent due to their form (e.g. inventories and pre-paids) 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 (governing body). 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 been 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.

Non-spendable and Restricted Funds
Non-spendable funds are those funds that cannot be spent because they are either:

1) Not in spendable form (e.g. inventories and pre-paids).
2) Legally or contractually required to be maintained intact.

It is the responsibility of the finance director to report all non-spendable 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 also must 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 an ordinance. The passage of an ordinance must take place prior to June 30 of the applicable fiscal year. If the actual amount of the commitment is not available by June 30, the ordinance must state the process or formula necessary to calculate the actual amount as soon as information is available. In the event the governing body wishes to lift the committed status of funds so that they may be used for general purposes, an ordinance must be passed to do so.

Stabilization Funds
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 percent of general fund expenditures. The recognition of an urgent event must be established by the governing body or its 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 its 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 per purpose or in total not to exceed . 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 two-thirds vote of the city’s governing body.

The fund balance policy establishes a minimum unassigned fund balance equal to 15 percent 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.

Purpose
The city hereby establishes and will maintain reservations of fund balance as defined herein in accordance with Governmental Accounting Standards Board Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions and with regards to guidance from the Government Finance Officers Association (GFOA) GAAFR. This policy shall apply to the city’s general fund and general debt service fund. Governmental fund balance may be composed of restricted, committed, assigned, non-spendable and unassigned amounts per GASB Statement 54.

Minimum Level of Unassigned Fund Balance – General Fund
The general fund unassigned fund balance will be maintained at a level sufficient to provide for the required resources to meet operating cost needs, to allow for unforeseen needs of an emergency nature, and to permit orderly adjustment to changes resulting from fluctuations of revenue sources. Given that current property tax collections do not begin until the fourth month of the fiscal year, Sample City will maintain at least 15 percent of the next year’s budget in the unassigned fund balance of the general fund.

Any amounts remaining in the fiscal year-end unassigned fund balance in excess of 15 percent of the approved subsequent year’s budget will be available for appropriation by the city legislative body to cover such items as revenue shortfalls and unanticipated expenditures, and to ensure stable tax rates. The city legislative body will attempt whenever possible to avoid appropriating such funding for recurring expenses.

Minimum Level of Fund Balance – General Debt Service Fund
It is the practice of the city to pay the principle and interest requirements on the city’s debt obligations from the debt service fund. Each year the budget committee of the city shall determine or estimate the principle and interest requirements of the city and recommend sources of revenues to meet these actual or projected requirements. Additionally, it shall be the policy of the city to begin each fiscal year with a balance of cash or investments in the debt service fund in a conservatively calculated amount adequate to meet (1) cash flow needs, (2) budgeting contingencies, (3) emergency contingencies, (4) variable rate volatility contingencies, and (5) future forecasted needs.

Cash flow requirement component: The majority of local city revenues come from property taxes. Property taxes levied for a specific fiscal year are generally collected in the second half of that fiscal year. For this reason, it is common for the city to expend more than it collects during the first half of the fiscal year. For this reason, it shall be the policy of the city to begin each fiscal year with a sum of cash or investments equal to the debt service fund requirements scheduled to be expended during the first six months of the next fiscal year. This amount will typically equal six months of interest expense on the city’s total indebtedness unless the city schedules principal payments in the first six months of the fiscal year. Generally, except for short-term capital outlay notes, the city will not schedule principal payments in the first six months of the fiscal year.

Annual Review and Determination of Fund Balance Reserve Amounts
Compliance with the provisions of this policy shall be reviewed as a part of the annual budget adoption process and amounts of the minimum level of unassigned fund balance in the general fund and the minimum level of available fund balance (for debt service payments) in the debt service fund shall be determined during this process.

State law requires municipalities be audited. The financial statement audit must be performed in accordance with generally accepted government auditing standards also known as the Yellow Book.* This means that auditors must follow statements on auditing standards (SAS) issued by the American Institute of Certified Public Accountants (AICPA) and additionally comply with government auditing standards issued by the United States Government Accountability Office (GAO). The audit industry has come under scrutiny in recent years due to major corporate frauds and failures. As a result, the industry has strengthened auditing requirements related to internal controls and communications of audit deficiencies.

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*AKA Government Auditing Standards

Government Auditing Standards (the "Yellow Book") contains standards for audits of government organizations, programs, activities, functions, and of government assistance received by contractors, nonprofit organizations, and other nongovernment organizations. These standards, often referred to as generally accepted government auditing standards (GAGAS), are to be followed by auditors and audit organizations when required by law, regulation, agreement, contract, or policy. These standards pertain to auditors' professional qualifications, the quality of audit effort, and the characteristics of professional and meaningful audit reports. The Tennessee Division of Local Government Audit requires auditors who contract to perform municipal audits in Tennessee to follow these standards.

Statement on Auditing Standards 114 (SAS 114), The Auditor’s Communication with Those Charged with Governance, requires that auditors communicate certain information to those charged with governance of the municipality. Who that might be varies from one municipality to the next, but ultimately it is the local governing board. Tennessee Code Annotated § 6-56-101 states “It is the duty of the governing board of every municipal corporation to have a thorough audit of the financial affairs of the corporation …”

If the municipality has established an audit committee or has a finance committee, then that committee has the responsibility to oversee the audit function. If there is no such committee, then the full governing board would be considered to be “those charged with governance” for the purpose of auditor communication. The audit standard defines “those charged with governance” as:

“the person(s) with responsibility for overseeing the strategic direction of the entity and obligations related to the accountability of the entity."

The auditor communication does not relieve management from also communicating certain matters to those charged with governance. Management is defined by SAS 114 as: “the person(s) responsible for achieving the objectives of the entity and who have the authority to establish policies and make decisions by which those objectives are to be pursued. Management is responsible for the financial statements, including designing, implementing, and maintaining effective internal control over financial reporting.” Management in your city or town could be the mayor, city manager, city administrator or finance officer. It will vary depending on how the governing board and the city charter delegates the responsibilities of municipal government.

Purpose of Communication
The purpose of the auditor communication with those charged with governance is to:

• Communicate the responsibilities of the auditor as related to the financial statement audit and provide an overview of the scope and timing of the audit;
• Obtain information relevant to the audit; and
• Provide timely observations, arising from the audit, that are relevant to their responsibilities of oversight.

Form of Communication
Communication may be written or oral. The auditor must use professional judgment to determine when oral communication would not be adequate. Whether delivered in writing or orally, the communication must come directly from the auditors. The auditor cannot rely on municipal management to relay the required communication to the governing board.

Content of Communication
Municipal officials should receive auditor communication at the beginning of the audit process which explains:

• the auditors’ responsibilities for the audit
• an overview of the scope of the audit
• the timeframe of the audit

This may be in the form of an audit engagement letter or in a separate letter.

Another auditor communication should be made at the end of the audit process that details significant matters encountered during the audit. Significant findings may include:

• Unacceptable or inappropriate accounting practices
• Difficulties experienced during the audit
  • ​Significant delay receiving information from management
  • Unnecessarily brief time to complete the audit
  • Extensive unexpected effort required to obtain sufficient appropriate audit evidence
  • Expected information is unavailable
  • Management imposed restrictions on auditors
  • Management’s unwillingness to provide information on how it plans to deal with going concern issues
• ​Material uncorrected misstatements in the financial statements
• Disagreements with management
• Management’s consultation with other accountants
• Significant matters discussed with management

Two-way Communication
It is the responsibility of the auditor to ensure that communication with those charged with governance is adequate. If the governing body is not receiving adequate information concerning the audit process and audit findings, it is the auditor’s responsibility to make necessary changes in the communication process to ensure audit information is properly communicated.

In Summary
Municipal elected officials and municipal management should be aware of the communications that auditors should make related to the annual audit. The governing board is ultimately responsible for ensuring the audit is performed. The governing board, audit committee or finance committee should make every effort to understand the auditor communications and ask questions when certain matters are not clear. The auditor cannot delegate his obligation to communicate with the governing body to municipal management. Auditors who do not formally present audit reports at board or committee meetings should mail the required communications and a copy of the audit report directly to each board or committee member. 

References:
AICPA, Generally Accepted Auditing Standards, AU Section 380.
AICPA, SAS 114, The Auditor’s Communication with Those Charged with Governance.
Government Accountability Office, Government Auditing Standards, GAO-07-731G.

Annual Reporting Requirements of the State Office of State & Local Finance
The State of Tennessee Comptroller of the Treasury, Office of State & Local Finance (OSLF), is the agency responsible for oversight of city-issued debt. Cities that issue debt, must annually submit their budgets to the OSLF for approval before the budget becomes official. This requirement applies to any debt. Every city must file, within 45 days from issuance, Form CT-0253 to the state on all debt issued.

The OSLF requires the submission of a cash basis balanced budget with certain supporting documents for approval. These documents must contain sufficient information for the state to determine if the city’s budget is balanced on a cash basis and that appropriations are sufficient to meet all expenses of operations and annual debt service requirements. A budget will be considered balanced on a cash basis if beginning cash balances plus revenues are enough to cover the appropriations. The following is a list of example items your city may be required to submit in order to comply with the OSLF requirements. (Refer to the annual memorandum mailed to cities by the OSLF in the spring each year for other specific information required):

• A copy of your annual operating and capital budget ordinance after adoption, with any supporting schedules. This should be a certified copy. If the city is not able to adopt a budget by July 1, a continuation budget ordinance must be submitted for approval.
• A certified copy of your tax levy ordinance (if separate from the budget ordinance).
• Your detailed annual operating budget after passage. Use a three-column format showing last year’s actual figures from the audit report, this year’s projected data, and the next year’s proposed budget. This should include detailed revenues, expenses/expenditures, and beginning and ending cash balances. All funds, including enterprise funds, must be included. Enterprise Fund budgets typically do not list debt principal repayments because budgets are to be prepared on a cash basis. To comply with the state requirements, if your city has prepared an enterprise fund budget on the accrual basis, then you will need to convert it to the cash basis for submission to the OSLF. Alternatively, at the end of your expense budget, a reconciliation can be prepared removing any depreciation and amortization, and adding debt principal repayments. Interest payments are already properly recorded as an expense. This converts your accrual-based budget to a cash basis budget.
• A budget summary schedule (format provided by state).
• A schedule of outstanding debt and a schedule of budgeted debt payments by fund (formats provided by state). These two schedules should be reconciled to each other.
• Revenue projections for property tax and sales tax, if applicable. For property taxes, calculate the projected revenue by multiplying the assessed value by your property tax rate, and then dividing the total by $100. Include this information as a schedule that you send to the state.
• A statement of cash flow analysis for enterprise funds and any other fund requesting tax/revenue anticipation notes.
• A copy of your capital budget if you have one. Except for general law modified city manager-council charter cities, there is no requirement to produce a capital budget. You should notify the state if you do not have one so that the budget approval process will not be slowed by the OSLF staff looking for something that does not exist.
• A SRF loan covenant and Water Wastewater Financing Board worksheet, if applicable.
• A city with a school system must submit the balanced school budget. These requirements are only for the OSLF, other agencies may require separate reporting. Be sure that the city's appropriated expenditure for the school system matches the revenue listed in the school system's budget. If the school system has outstanding debt, the above mentioned debt schedules should be included for the school system also.

These are the basic requirements. The OSLF may ask for additional details or schedules. As you might imagine, this is serious business, and budgets that don’t balance or that are without sufficient detail for analysis will slow the approval of your budget.

For more information:
Office of State & Local Finance
State of Tennessee
Comptroller of the Treasury
Office of State and Local Finance
Division of Local Finance
Cordell Hull Building
425 Fifth Avenue North
Nashville, Tennessee 37243
Phone: (615) 401-7872
Fax: (615) 741-5986

• This law does not apply to municipalities and metropolitan governments above 100,000 in population.
• It includes all cities with populations below 100,000.
• It covers city boards, city utility boards, boards of education and other boards or committees.
• MTAS is required to write a model travel and expense policy to guide municipalities. This policy and any amendments are subject to comptroller approval.
• Any city can write its own travel policy and file it with the comptroller. A travel policy written and adopted by a city does not need comptroller approval; it just has to be filed.
• If a city wants different travel policies or reimbursement rates for different boards, board members or employees, it apparently can do that. But the city must write its own policy and file it with the comptroller.
• If a city adopts the MTAS model, it must decide which travel reimbursement rate schedule (federal or state) to follow and complete the blank line, pass the ordinance and notify the comptroller in writing.
• Municipalities may provide vehicles for city officials. This sample travel policy does not cover the requirement that “a written policy shall be adopted by the municipal legislative body. The written policy for vehicle use shall be separate from the travel and expense policy provided for in the previous sections and shall contain no other subject matter.”
• Travel allowances not supported by adequate documentation are considered compensation. If statute, charter or private act limits an official’s pay, undocumented travel could cause the salary to exceed that limit.

ORDINANCE NO. ______

AN ORDINANCE OF THE CITY (TOWN) OF ________________________, TENNESSEE, TO ESTABLISH TRAVEL REIMBURSEMENT REGULATIONS FOR CITY OFFICIALS AND CITY EMPLOYEES CONDUCTING OFFICIAL BUSINESS.

PURPOSE
The purpose of this ordinance and referenced regulations is to bring the city into compliance with Tennessee Code Annotated § 6-54-901–907. This law requires Tennessee municipalities to adopt travel and expense regulations covering expenses incurred by "any mayor and any member of the local governing body and any board or committee member elected or appointed by the mayor or local governing body, and any official or employee of the municipality whose salary is set by charter or general law."

To provide consistent travel regulations and reimbursement, this ordinance is expanded to cover regular city employees. It is the intent of this policy to assure fair and equitable treatment to all individuals traveling on city business at city expense.

ENFORCEMENT
The chief administrative officer (CAO) of the city or his or her designee shall be responsible for the enforcement of these travel regulations.

TRAVEL POLICY
A. In the interpretation and application of this ordinance, the term "traveler" or "authorized traveler" means any elected or appointed municipal officer or employee, including members of municipal boards and committees appointed by the mayor or the municipal governing body, and the employees of such boards and committees who are traveling on official municipal business and whose travel was authorized in accordance with this ordinance. "Authorized traveler" shall not include the spouse, children, other relatives, friends, or companions accompanying the authorized traveler on city business, unless the person(s) otherwise qualifies as an authorized traveler under this ordinance.

B. Authorized travelers are entitled to reimbursement of certain expenditures incurred while traveling on official business for the city. Reimbursable expenses shall include expenses for transportation; lodging; meals; registration fees for conferences, conventions and seminars; and other actual and necessary expenses related to official business as determined by the CAO. Under certain conditions, entertainment expenses may be eligible for reimbursement.

C. Authorized travelers can request either a travel advance for the projected cost of authorized travel, or advance billing directly to the city for registration fees, air fares, meals, lodging, conferences and similar expenses.

 

Signed:_______________________________________________________

                                                         Mayor

 

Attested:_____________________________________________________

Notes:

• If a city decides not to adopt this model travel policy and the administrative procedures that follow, then that city must prepare and file its own travel policy with the comptroller.
• If your city would like a copy of the comptroller's approval letter of the MTAS policy, contact MTAS.

Click on the topics below in this section for more information.

Examples of travel forms below.

The Internal Revenue Service periodically announces changes in the optional standard mileage rate. The optional rate may be used to reimburse employees for the use of personal vehicles in the course of business activities.

The rate for 2018 is 54.5 cents cents per mile for all business miles driven on or after January 1, 2017. You can go to IRS Notice IR-2014-114 at https://www.irs.gov/newsroom/standard-mileage-rates-for-2018-up-from-rates-for-2017 [16] for details and further explanations.

Municipalities that reimburse employees for business use of their personal vehicles based on the federal optional standard rate should revise their travel policies to reflect this change if necessary.

For those municipalities that reimburse employees for business use based on the state of Tennessee mileage rate, the current rate effective August 1, 2011, is 47 cents per mile.