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HomeMy WebLinkAboutFund Balance Policy TOWN OF ITHACA FUND BALANCE POLICY A. Purpose: For increased financial stability, the Town of Ithaca (Town) desires to manage its financial resources by establishing a fund balance policy for the General Fund. This will ensure the Town maintains a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of temporary revenue shortfalls, unexpected one-time expenditures, emergencies and disasters. Fund balance and reserve maintenance are also major factors considered by bond rating agencies when evaluating the Town's credit worthiness. B. Background: The Governmental Accounting Standards Board (GASB) issued GASB Statement Number 54, Fund Balance Reporting and Governmental Fund Type Definitions. Statement 54 abandons the reserved and unreserved classifications of fund balance and replaces them with five new classifications for Governmental Funds: non-spendable, restricted, committed, assigned and unassigned. The last three classifications comprise the unrestricted fund balance. The statement went into effect June 30, 2011. In April 2011 the Office of the State Comptroller (OSC) issued guidance on Fund Balance Reporting and Governmental Fund Type Definitions. The guidance addressed how the changes in GASB 54 were being implemented in the Annual Update Document and the effects on local government reporting. C. Definitions: 1. Fund Balance — Consists of the measurement of available resources and represents the difference between total assets and total liabilities. 2. Non-spendable — Consists of the amounts that cannot be spent because they are in a non-spendable form. 3. Restricted —Consists of amounts that are subject to externally enforceable legal purpose restrictions imposed by certain creditors, grantors, contributors, or laws and regulations of other governments; or through constitutional provisions or enabling legislation. 4. Committed (Unrestricted) — Consists of amounts constrained to specific purposes by a government itself using its highest-level decision-making authority (Town Board). The Town Board must take formal action before the end of the fiscal year to add or remove a constraint. 5. Assigned (Unrestricted) — Consists of amounts that are subject to a purpose constraint Adopted 2021-07-12 Pg. 1 that represents an intended use established by the government's highest-level decision-making authority (Town Board), or by the Town Board's designated body or official.The purpose of the assignment must be narrower than the purpose of the general fund. In funds other than the general fund, assigned fund balance will be the residual amount of fund balance. 6. Unassigned (Unrestricted) —This consists of all balances remaining after considering the other four categories for the general fund and could result in a surplus or a deficit. Use is least constrained in this category. In funds other than the general fund, the unassigned classification should only be used to report a deficit balance. D. Classifications: 1. Non-spendable • prepaid insurance 2. Restricted (Reserves) • Capital Reserves • Debt Reserves • Repair Reserves • Insurance Reserve • and other reserves allowed by State statutes. 3. Committed (Unrestricted) • OSC believes that in most cases, local governments will not have committed fund balance to report primarily due to the fact that reserves are allowed by State statutes. 4. Assigned (Unrestricted) • OSC believes that formal actions by the governing boards (resolutions, ordinances, and local laws) constitute a constraint of resources and will result in an assignment of resources. • Encumbrances will typically be considered an assignment of fund balance. 5. Unassigned (Unrestricted) • All other unassigned fund balances. E. Policy: 1. Reserves—Town reserve funds must be properly established and maintained to promote the goals of creating an open, transparent, and accountable use of public funds. a. The Town shall strive to maintain a level of reserves to guard its citizens against a service disruption because reserves are essential to dealing with unforeseen emergencies or changes in condition b. Funding of reserves can come from surplus funds (excess of revenues over Adopted 2021-07-12 Pg. 2 expenditures or one-time revenues) or other sources as designated by the Town Board. c. All expenditures from or uses of reserve will require prior Town Board approval by adoption of Use of Reserve Resolution. d. Reserves shall only be used for the purpose in which they are intended. 2. Unassigned (Unrestricted) Fund Balance a. The unrestricted unassigned fund balance range for the General Fund and assigned unappropriated fund balance for General Part-Town and Highway Funds, shall be not less than 30.00% and not more than 40.00% of the total adopted budgeted expenditures of the Fund. The unprecedented events of 2020 have impressed upon us the need to have ample reserves to deal with the unexpected. From a global pandemic, climate change and extreme weather events, and nationwide civil unrest resulting in widespread (sometimes destructive) protests. The future of higher education is changing in our community with decreased enrollment and an increase in online students. The property tax base could be negatively affected in the next few years due to the pandemic and subsequent economic downturn combined with fewer students residing in Ithaca. b. The Finance Officer shall annually calculate and verify the Town's compliance with this policy. In determining compliance, the following formula will be used: the audited balance available in the unrestricted unassigned fund balance of the Town's General Fund and assigned unappropriated fund balance for General Part-Town and Highway Funds for the most recently audited fiscal year, divided by the adopted expenditure budget for the ensuing fiscal year for each Fund. c. The Finance Officer shall report annually to the Budget Committee the results of the calculation and make recommendations for the use of funds in the event of a surplus or the replenishment of funds in the event of a deficit. d. Surplus: In the event the unrestricted unassigned fund balance of the Town's general fund exceeds the maximum requirement of 40%, the excess may be utilized for any lawful purpose approved by the Town Board. In order to minimize the long term effect of such use, the excess shall be appropriated to fund one time expenditures or expenses which do not result in recurring operating costs, or other one-time costs including early repayment of debt and the establishment or increase in legitimate restrictions (reserves) of fund balance. The surplus may also be used to replace an unanticipated revenue shortfall. Any excess shall be obligated within the next two budget cycles. e. Deficit: In the event the unrestricted unassigned fund balance for the Town's general fund falls below the minimum requirement of 30% for any fiscal year, the Finance Officer shall prepare and submit to the Town Board a plan to restore the balance to the minimum target level within the next two budget cycles (or other appropriate period). 3. Application of Funds: Adopted 2021-07-12 Pg. 3 In instances where expenditures are incurred that will require the funding sources to be comprised of two or more types of fund balance categories, the order of exhaustion of the fund will be as follows: 1. Restricted 2. Committed 3. Assigned 4. Unassigned F. Review: This policy will be presented by the Finance Officer annually for review and adoption by the Town Board. Adopted 2021-07-12 Pg.4