How to Develop a Fund Balance Policy to Help Communicate With Governmental Stakeholders

CPAs & Advisors

Alan D. Panter
Alan D. Panter CPA, CGFM Principal CPAs & Advisors

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Since the release of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, many governments have developed and adopted policies that communicate what management and those charged with governance believe to be the appropriate levels and a framework for use and maintenance of fund balance reserves. Formally adopted fund balance policies help to define and communicate the balance that should be maintained in specific funds, use and replenishment of funds, authority to make changes, reporting requirements, and priority of use.

The fund balance policy should begin with a statement of scope and purpose. The General Fund, as the primary operating fund of the government, will be included but the policy should also define which other funds are covered and which are exempted. A purpose statement frames the policy and lays out what the governing body believes to be the methodology for sound financial management practices as it applies to fund balance.

Fund balance definitions are readily available from a variety of sources, but a fund balance policy will generally contain either a glossary of terms as an attachment or include those definitions in the body of the policy. The policy should define what fund balance is, the various components of fund balance, any budgetary terms being used, and any necessary terms related to enterprise funds if they are included in the policy.

Appropriate levels of fund balance reserves are the focal point of most fund balance policies. Each government will need to determine what that level is for each fund included in the policy and how it is defined. Considerations will include contingencies, credit standing, risk tolerances, cash flow, and transparency. Fund balance levels are generally expressed as a percentage (or range of percentages) of annual operating expenditures, total expenditures (including capital outlay, debt service, and other financing uses), or as a percent of revenues, and this may vary from fund to fund in the policy. The Government Finance Officers Association (GFOA) recommends that general-purpose governments maintain a minimum level of unrestricted fund balance in the General Fund of at least two months’ operating revenues or expenditures. Maximum fund balance levels are more a matter of discretion and depend heavily on what the governing body’s plans and economic expectations are.

The policy will contain guidance on when, how, and if reserves can be used and how they are to be replenished if a given fund falls below the defined target range. Reserves could be used for capital projects, as a “rainy day” fund, or to invest in new or expanded governmental programs. Replenishment of the reserves would be discussed in terms of where the funds are to come from (whether that is through excess of revenues over expenditures or one-time revenue sources) and the time frame anticipated for this to take place.

Governmental funds report fund balances categorized per GASB 54 as non-spendable, restricted, committed, assigned, and unassigned. Non-spendable and restricted amounts generally are not considered to be part of the desired levels of reserves discussed above, which is generally defined as the total of committed, assigned and unassigned amounts in a fund. Committed funds are established, modified, or rescinded by formal action of the highest level of decision-making authority such as a City Council, Board of Commissioners, or a Board of Education. The fund balance policy often defines what that formal action is. The authority to assign fund balance for specific purposes is reserved to the governing body unless that is delegated, which can be done in the fund balance policy. This authority is often delegated to the Chief Financial Officer, City Manager, County Administrator, or Superintendent as applicable.

Enterprise funds may or may not be included in the fund balance policy. Fund equity in an enterprise fund is referred to as net position and is calculated on the full accrual basis of accounting (and therefore contains non-current items such as capital assets and debt) as opposed to the modified accrual basis used in governmental funds. Fund balance policies generally concentrate on currently available financial resources, which is more directly related to fund balance in a governmental fund. As a result, an enterprise fund generally would focus on net working capital (the difference between current assets and current liabilities) as the accepted way to measure liquidity and reserves. The GFOA recommends a target level of working capital in enterprise funds to be between 45 and 90 days of annual operating expenses.

GASB 54 requires governments to disclose in the annual financial statements what their policy is as to the order of use that would be applied to restricted or unrestricted (committed, assigned, unassigned) funds. In the absence of a formal fund balance policy, this is often “boilerplate” language suggested by the auditors or borrowed from another government’s statements. The fund balance policy would include a statement on when restricted or unrestricted funds would be used as well as the order in which unrestricted amounts are considered to be reduced when expenditures are incurred.

A simple internet search will yield a lot of resources available to help with the development of a fund balance policy, including many examples from other governments. Also, your Yeo & Yeo professionals are available to assist you as well. Please don’t hesitate to reach out if we can be of assistance.






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