The term “fund balance” is often confused with the amount of cash a government has available to spend. A government’s fund balance and cash balance are rarely the same. Fund balance includes cash balances in its calculation, but it also includes all other assets and liabilities the government has. Fund balance simply represents the difference between the assets and liabilities a government holds.
There are five distinct categories of fund balance:
- Nonspendable – items such as prepaid expenditures and inventories.
- Restricted – resources that have imposed restrictions, such as specific tax levies or grants.
- Committed – amounts that have been internally constrained by the government’s highest-level decision-making body, such as a city council or board of trustees.
- Assigned – amounts designated for specific purposes by an authorized individual, often the finance director.
- Unassigned – all remaining fund balances that do not fall into the categories above.
Each government should adopt a fund balance policy that defines the above categories.
Governments often find it helpful to assign minimum and/or maximum thresholds to fund balance categories to maintain a comfortable reserve balance. That is, to ensure a rainy-day fund for unforeseen costs and restrict too much accumulation of fund balance. In most cases, the minimum or maximum thresholds are presented as a percentage of annual expenditures or as a set number of months of expenditures. For example, a government may determine that the unassigned fund balance in the General Fund should not fall below 25% of expenditures. In this case, the government has set 25% as its minimum fund balance policy and should be careful to comply with the internal policy when assigning or committing fund balance. Each government should determine what is an appropriate minimum to fit its specific situation.
The policy should identify and designate who, or which position, is authorized to assign fund balance.
Many governments identify spending prioritization, although it is not required. The Governmental Accounting Standards Board (GASB) has included in GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, the assumption that absent any policy, expenditures would reduce the most constrained type of fund balance category allowable for the expenditure.
If your government entity needs assistance with drafting a fund balance policy, contact your Yeo & Yeo CPA.