The Big Change - Florida League of Cities

FinancialServices
by G. Robert Smith Jr., Ph.D., CPA, CGFM
Fund Balance Reporting:
The Big Change
F
or years – probably ever since
you started your career in government – your city’s finance director
has reported fund balance in the same
manner. Typically, fund balance has
been reported in one of two categories:
reserved and unreserved.
Reserved fund balance represents
restrictions placed by a city, its governing body or external parties on
how the city’s future use of this part of
fund balance is to be used. Unreserved
fund balance represents that part of
fund balance with which the city has
greater flexibility. It usually consists
of two subclassifications – designated
or undesignated, indicating greater or
lesser control on how the city plans to
spend this funding in the future. Your
city may continue to manage its available resources in this manner.
By the end of fiscal year 2011, these
categories will change, at least for
external reporting purposes. This last
point is very important. Statement No.
54 of the Governmental Accounting
Standards Board, “Fund Balance Reporting and Governmental Fund Type
Definitions,” establishes new rules for
fund balance reporting.
The new standard is effective for
periods beginning after June 15, 2010.
34 Florida League of Cities
However, it does not establish formal
rules for accounting. Your city may
continue to account for fund balance
in the same manner it has used in the
past. However, your city’s finance
director will have to adjust the city’s
management accounting system to meet
the reporting requirements. Remember:
The finance director must report using
generally accepted accounting principles for state and local governments.
Since the new standard does offer some
significant improvements over the current system, it may be advantageous
for your city to change its management
system to this reporting format.
The principal change in fund balance
reporting is the number of categories
that cities have to report. As noted
above, cities have traditionally reported
in two categories: reserved and unreserved. Now, they will report using up
to five categories. Notice that I said “up
to five”; there is no requirement to use
all five categories. Some governments –
particularly large ones – will report all
five categories, while others will only use
two or three. The number of categories
is up to each city and its finance director.
What are the new categories? The
answer is as follows: nonspendable,
restricted, committed, assigned, and
unassigned. This order is important, as
it may affect how much is reported in
each category. Each of these categories
is discussed briefly below.
To see how these five categories
will affect financial reporting, I will
use the City of Ocala’s September 30,
2008, Governmental Funds Balance
Sheet.1 (A copy of Ocala's September
30, 2008, Comprehensive Annual
Financial Report can be downloaded
at www.ocalafl.org/uploadedFiles/
CMO_Services/...and.../2008_CAFR.
pdf). I can tell from the city’s Comprehensive Annual Financial Report that
it has one General Fund, six Special
Revenue Funds (SRFs), six Debt Service
Funds (DSFs) and three Capital Project
Funds (CPFs). Only the General Fund
is reported as a major fund.
On Ocala’s balance sheet, four
categories of reserved fund balance
are reported: debt service, transportation, district improvements and capital
improvements. The city also reports
amounts designated for specific projects in the General Fund, and undesignated amounts in the General Fund
and Special Revenue Funds. There are
no unreserved fund balances in the
DSFs or CPFs. The following sections
explain how these classifications will
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appear on a balance sheet that follows
the requirements of GASBS 54:
Nonspensable Fund Balance: This
portion of fund balance is exactly what
it sounds like: It cannot be spent. It represents assets that are on the city’s balance sheet that do not represent spendable resources or that have already
been spent. Examples of resources that
have already been spent are inventory
and prepaid insurance. An example
of a resource that is not in spendable
form is a long-term loan (advance) to
another fund. Interestingly, the City
of Ocala does not report any of these
assets. However, some of its “Other
Assets” may represent prepaid items.
If so, and if the amounts are material,
that amount will need to be reported
as nonspendable fund balances. If not,
the city will not use this category.
Restricted Fund Balance: For those
of you more familiar with financial
reporting, this category might sound
familiar. Since the implementation of
GASBS 34, governments have reported
restricted net assets. Starting in 1999,
Orlando was one of the first in the
country to implement this standard.
This category of fund balance means
the same thing – the fund balance may
be restricted for one of two reasons:
 externally imposed by creditors
(such as through debt covenants), grantors, contributors,
or laws or regulations of other
governments; or
 imposed by law through constitutional provisions or enabling
legislation.
In the Ocala report, it appears that
the balances found in the DSFs could
fall under this first requirement. The
same can probably be said for the
CPFs. If not, the amounts most likely
would be in the next category.
Committed Fund Balance: This
part of fund balance has been set aside
by the highest-level decision-making
authority of the government (usually
the city council) for a specific purpose.
For example, in Ocala, amounts have
been set aside in two of the SRFs for
About GASB
The Governmental Accounting
Standards Board (GASB) is the
independent organization that
establishes and improves standards of accounting and financial
reporting for U.S. state and local
governments. Visit www.gasb.org
for more information.
district improvements and in another
SRF for transportation. Unless the
funding for these projects came from
another government (which could
make it a “restricted” fund balance),
the fact that the funding is reserved
would normally indicate that the city
council has voted to set aside this portion of fund balance. How this decision
was made – through a formal vote – is
necessary both to make the commitment and to remove it. For the City
of Ocala, the amounts not restricted
by external parties likely will be committed.
Assigned Fund Balance: This category has two significant purposes.
First, in governmental funds other
than the General Fund, it is a residual
category. The mere fact that there is
fund balance in an SRF that has been
classified as nonspendable, restricted
or committed makes the funding assigned simply because it is in this fund.
For amounts to be assigned in the
General Fund, the assignment must be
for a project that is beyond the general
purpose of the government. In the City
of Ocala example, the designation for
specific projects probably meets this
requirement in the General Fund.
Unassigned Fund Balance: If, in
the General Fund, your city has fund
balance that is not nonspendable or
has been restricted, committed or assigned, that residual would go here.
The General Fund is the only fund that
can report a positive amount in this category. Any fund can report a negative
amount in this category, but only after
wiping out any assignments previously
reported. After all, if an assignment
causes the residual fund balance to
be negative, the government would
have “assigned” fund balance that it
did not have. All assignments must be
eliminated before a negative amount is
reported in unassigned fund balance. In
the City of Ocala’s case, since all funds
had a positive fund balance, this will
not happen.
4
Quality Cities — May/June 2010 35
As a matter of review, the City of
Ocala has $59,402 (rounded to the
nearest thousand dollars) in fund balance. Of this amount, the city probably
will report the following amounts in its
newly classified fund balance presentation based on GASBS 54:
Capital Projects Funds
What has changed for the City of
Ocala? Actually, very little. The same
amounts still are in fund balance;
they are just reported a little differently. What could change for other
governments might be reserves for
encumbrances. Encumbrances should
no longer be reported on the face of the
balance sheet. Instead, the purpose of
the encumbrance – for supplies, other
outstanding construction projects,
or future-year expenditures – should
be reported. However, that does not
mean that your city needs to do away
with encumbrance accounting. It still
is a valuable tool in budgetary control
of funding.
There are other issues covered in
GASBS 54 – most notably, note disclosures and governmental fund-type
definitions. However, these topics will
be addressed at another time.
Restricted for Capital
Projects $16,506
Conclusion
General Fund
Nonspendable for Other Assets $22
Assigned for Special Projects $8,002
Unassigned $19,047
Special Revenue Funds
Nonspendable for Other Assets $9
Committed for
Transportation $5,158
Committed for District
Improvements $1,780
Assigned $4,663
Debt Service Funds
Restricted for Debt Service 36 Florida League of Cities
$4,215
This new fund balance classification
will not only improve the reporting of
fund balance, it will help city officials
as well as residents better identify the
limitations placed on net resources. Not
all governments will have all five components of fund balance. Each entity
should review its current fund balance
policies and procedures to determine
what changes need to be made to comply with GASBS 54.
Note
The City of Ocala was randomly
selected as an example by the author.
1
G. Robert Smith Jr., Ph.D., CPA,
CGFM, is an associate professor of
accounting, chairman of the Department of Accounting, and holder of the
Dempsey, Vantrease & Follis Professor
chair at Middle Tennessee State University, in Murfreesboro, Tenn. Smith has
served on several GASB task forces and
has been the AAA representative to the
Governmental Accounting Standards
Advisory Council since 2006. He has
also served on numerous committees
for the Government Finance Officers
Association.