Fund Your Future: Understanding and Protecting Fund Balances

After a year of pandemic and other emergencies, governments across the U.S. are looking at the reserves in their fund balance. Do they have enough to pay staff, maintain infrastructure and serve constituents if there’s another unexpected turn that reduces revenues and increases expenditures?  

Elected officials are asking, “How’s our fund balance?”

When tax and other revenues fall, a healthy fund balance enables local agencies to continue providing routine services, retain staff and address unexpected needs such as setting up COVID-19 vaccination sites.

More Than One Kind of Balance

As they consider the possibility of tapping into their fund balance to make up for revenue shortfalls, government agencies will need to keep in mind some basic accounting requirements. The Governmental Accounting Standards Board, or GASB, has established these five categories for fund balance in GASB 54:

Nonspendable balances are not expendable or are legally or contractually required to be maintained intact. This includes nonexpendable areas like inventory and prepaids as well as balances that are legally or contractually required to be maintained intact. The corpus of a permanent fund is an example.

Restricted balances can be spent only for the specific purposes stipulated by the state constitution, external resource providers (e.g., grantors), or enabling legislation. These restrictions are external, as opposed to committed balances, which an agency constrains by its own choice.

Fund balance should be reported as restricted when constraints placed on the use of resources are either:

1. Externally imposed by creditors, grantors, contributors, or laws or regulations of other governments; or
2. Imposed by law through constitutional provisions or enabling legislation.

This includes restrictions for the retirement of debt, federal and state financial assistance, and donations or contributions. Transfers from one fund to another for a specific purpose does not constitute restricted fund balance.

It is important to remember that restrictions are defined by external factors and those restrictions can be overlooked. For example, the general fund can hold a restricted fund balance for items like the retirement of note payables and leases. This detail is often forgotten.

Committed balances include amounts that can be used only for the specific purposes determined by a formal action of the government’s highest level of decision-making authority.

According to GASB 54, Paragraph 12: “The formal action of the government‘s highest level of decision-making authority that commits fund balance to a specific purpose should occur prior to the end of the reporting period, but the amount, if any, which will be subject to the constraint, may be determined in the subsequent period.”

This formal action will be a resolution or ordinance voted on by the City Council, Board of Governors or Board of Trustees, for example. The resolution can include a range of information, which can be as broad as commitments to future construction in general, or as specific as a new park or playground. Commitments must occur before fiscal year end. If circumstances change, the governing body must take another formal action (such as a resolution or ordinance) to modify, or rescind the commitment. Otherwise, those commitments are effective until the funds are used for the specified purpose.

Assigned balances are amounts intended to be used by the government for specific purposes but which do not meet the criteria to be classified as restricted or committed.

Assigned fund balance can be expressed by a body, such as a Budget or Finance Committee, or by an official to whom the governing body has delegated the authority to assign amounts to be used for specific purposes. This classification often includes projected budget deficit for subsequent years, encumbrances, insurance deductibles, or reserves for future capital improvements.

Unassigned fund balance is the residual classification for the government’s general operations fund and includes all spendable amounts not contained in the other classifications.

What Principles Should Guide Policy?

As you revisit your agency’s fund balance policies, don’t forget that GASB 54 requires that a policy addresses certain areas. Be sure to address each of the five fund balance categories in your formal fund balance policies. The policies should:

1. For committed balances, identify the body with the highest level of decision-making authority as well as the formal action required, such as a board/council resolution or ordinance approved by vote.
2. Define the body or official authorized to assign amounts.
3. Address the formal policy on minimum fund balance, often expressed as a multiple or a percentage of prior year revenues.

GASB doesn’t require the categories to be outlined in the policies, but internally, governments should track fund balance by category. This information is useful for the council or board in reviewing the fund, and your auditor will request it each year. 

If you have questions about your fund balance or any other aspect of government finance, contact us. Our experienced government team is always happy to help.

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