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HomeMy WebLinkAboutItem 06.qr A e -7 December 19, 2011 item No. FUND BALANCE CLASSIFICATION POLICY Proposed Action Staff recommends adoption of the following motion: Move to adopt the Fund Balance Classification Policy. Approval will result in formal adoption of accounting policy required by and consistent with Governmental Accounting Standards Board pronouncements Overview The Governmental Accounting Standards Board (GASB) released Statement No. 54 — "Fund Balance Reporting and Governmental Fund Type Definitions" on March 11, 2009 which is effective for period beginning January 1, 2011. This new Statement is intended to improve the usefulness of the amount reported in fund balance by providing a more structured classification. The hierarchy of the classification is based primarily on the constraints imposed upon the use of the resources reported in the governmental funds. This Statement applics to the fund balance reported in the governmental funds (General, Debt Service, Capital Projects, and Special Revenue) and does not apply to the proprietary funds (Enterprise and Internal Service). With these significant changes it is recommended that a fund balance policy be formally adopted to: define the classifications, specify the level of constraints on the purposes for which amounts in the classifications can be spent, and provide guidelines to maintain an adequate level of fund balance. Primary Issues to Consider Changes to the Policy. The policy was initially presented to the City Council at its November 28 work session. The Policy has subsequently been changed to include a section which describe each and every governmental fund and the parameters of designation those funds which are to be classified as "Committed ". Supporting Information • None Julie Wer$ez_Senior, Accountant Finance Director CITY OF LAKEVILL,E FUND BALANCE POLICY L PURPOSE The purpose of this policy is to establish specific guidelines the City of Lakeville will use to classify fund balances of the governmental fiords into categories based primarily on the extent to which the City is bound to honor constraints on the specific purposes for which amounts in these funds can be spent. The policy also establishes specific guidelines the City will use to maintain an adequate level of fund balance to provide for cash flow requirements and contingency needs. IL CLASSIFICATION OF FUND BALAN 1. Nonspendable • This category includes fund balance that cannot be spent because it is either (i) not in spendable form or (ii) is legally or contractually required to be maintained intact. Examples include long teen receivables, inventories and prepaid amounts. 2. Restricted Fuid balance should be reported as restricted when constraints placed on those resources that are either (i) externally imposed by creditors, grantors contributors, or laws or regulations of other governments or (ii) imposed by law through constitutional provisions or enabling legislation. 3. Committed o Fund balance that can only be used for specific purposes pursuant to constraints imposed by formal action of the government's highest level of decision - making authority The cony inted amounts cannot be used for any other purpose unless the government removes or changes the specified use by taking the saine type of action it employed to commit those amounts. • The City s highest level of decision making authority (City ('ouncil) will annually or as deemed necessary commit specific revenue sources for specified purposes by resolution if they so choose. This formal action must occur prior to thc end of the reporting period, however, the amount to be subject to the constraint, may be determined in the subsequent period. • City Council resolution is required to remove the constraint on the spccif ed use of' committed resources. IL CLAS OF FIJND BAL ANCE_ - CONTINUED 4. Assigned • Amounts that are constrained by the government's intent to use for specified purposes, but are neither restricted nor committed. Assigned fund balance in the General fund includes amounts that are intended to be used for specific purposes. • The City Council has delegated the authority to assign and remove assignments of fund balance amounts for specified purposes to the City Administrator, Finance Director or his/her designee. 5. Unassigned + Unassigned fund balance represents the residual classification for the General Fund. This is fund balance that has not been reported in any other classification. The General Fund is the only fund that can report a positive unassigned find balance. A negative residual amount may not be reported as restricted, committed, or assigned fund balances. Other Governmental funds would report deficit fund balances as unassigned. III. GOVERNMENTAL FUNDS 1. General Fund The General Fund is established to account for all revenues and expenditures which are not required to be accounted for in other funds_ Revenue sources include property taxes, license and permit fees, tines and forfeits.. program revenues, intergovernmental revenues, investment interest earnings, and transfers. The General Fund's resources finance a wide range of functions including the general government administration, community and economic development, public safety, public works, and parks and recreation. The General Fund may have a portion of its fund balance classified as nonspendable if there are long term receivables, inventories or prepaid items on the balance sheet. The City will endeavor to maintain an unrestricted (committed. assigned and unassigned) fund balance in the General Fulld of an amount not less than 4W`0 and not greater than 50% of the next year's budgeted expenditures of' the General Fund_ This will assist in maintaining an adequate level of fund balance to provide for cash flow requirements and contingency needs. 2- III. GOVERNM FU - C 2. Special Revenue Funds Special Revenue Funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditures for specified purposes other than debt service or capital projects. Governmental Accounting Standards require that substantial inflows of revenues into a Special Revenue Fund be either restricted or corrnnitted in order for the fund to be considered a Special Revenue Fund. The City has the following Special Revenue Funds: L Communications Fund — the fund balance is considered committed. The cable franchise fees are committed by City Council for operation and maintenance of a government access channel, public communication budget, long -term replacement of equipment and other uses as authorized within budget. ii. Economic Development Fund — the fund balance is both restricted and committed by grant agreement and by the City Council. The grant award is restricted by the Minnesota Department of Trade and Economic Development grant agreement. The administrative fee revenues are committed by the City Council for future economic development endeavors. iii. Downtown Special Service District Fund -- the fund balance is considered restricted pursuant to state statute. 3. Debt Service Funds Debt Service Funds account for the accumulation of resources for the payment of long- term debt principal and interest maturing in current and future years. All of the City's Debt Service fund balances are considered restricted pursuant to state statutes and respective debt agreements. 4. Capital Project Funds Capital Project Funds account for financial resources that are being accumulated for current and future projects. The Sand balances in the Capital Project Funds are appropriated to and therefore considered restricted or committed for these purposes: capital outlay expenditures, acquisition or construction of capital facilities, and other capital assets. Bond proceeds are considered restricted. The following address any other financial resources: L Municipal State -aid Fund -- the fund balance is committed by City Council for current and future street construction projects. II1. GOVER F l YNDS - CONTINUED ii. Pavement Management Fund - the fund balance is committed by City Council for current and future pavement management activities related to crack sealing, patching, seal coating and overlays. iii. Improvement Construction Fund - the fund balance is committed by City Council for current and future construction of public improvements such as streets, storm sewers. water and sanitary sewer trunk lines. iv. Storm Sewer Fund - the fund balance is committed by City Council for current and future construction of trunk storm sewer systems. v. Water Fund - the fund balance is committed by City Council for current and future construction of water supply lines, wells and water storage facilities, and provides debt service to bonds issued to finance construction of the City's water treatment facility and other trunk infrastructure improvements. vi. Sanitary Sewer Fund -- the fund balance is committed by City Council for current and future construction of sanitary sewer trunk systetns. vii. Park Dedication Fund - the fund balance is restricted pursuant to state statute. viii. Trail Improvement Fund - the fund balance is committed by City Council for current and future long term maintenance, repairs and replacement of the City trails. ix. Tax Increment Fund - the fund balance is restricted pursuant to enabling legislation. x. Building Fund - the fund balance is committed by City Council for current and future construction or improvement of public buildings. xi. Equipment Fund - the fund balance is committed by City Council for current and fixture capital acquisitions related to replacing vehicles, heavy machinery and technology. IV. PPOCEDURFS F AVAILABLP RLSOUR(TS When both restricted and unrestricted resources are available for use, it is the City's policy to first use restricted resources, and then use unrestricted resources as they arc needed. When unrestricted resources are available for use, it is the City's policy to use resources in the following order: 1.) committed 2.) assigned and 3.) unassigned_ -4- V. STABILIZATION ARRANGEME Stabilization arrangements are defined as formally setting aside amounts for use in emergency situations or when revenue shortages or budgetary imbalances arise. The City will set aside amounts by resolution as deemed necessary that can only be expended when certain specific circumstances exist. The resolution will identify and describe the specific circumstances under which a need for stabilization arises. The need for stabilization will only be utilized for situations that are not expected to occur routinely. Approved and Adopted December 19, 2011 - 5 -