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HomeMy Public PortalAbout13) 9A GASB 54DATE: May 15, 2012 AGENDA ITEM 9.A. ADMINISTRATIVE SERVICES DEPARTMENT TO: The Honorable City Council MEMORANDUM FROM: Jose E. Pulido, City Manager 6!r By: Tracey L. Hause, Administrative Services Director SUBJECT: GASB 54 FUND BALANCE POLICY RECOMMENDATION: The City Council is requested to: Adopt the attached Policy (Attachment "A") to classify current fund balance categories to be in accordance with the fund balance classifications contained in the reporting requirements of Statement 54 of the Government Accounting Standards Board (GASB) effective June 15, 2010. BACKGROUND: 1. In February 2009, the Government Accounting Standards Board issued Statement No. 54, "Fund Balance Reporting and Government Fund type Definitions" (GASB 54). The Statement required governmental entities, like the City, to adhere to the reporting requirements and adopt a policy implementing GASB 54 if they were to receive a qualified or "clean" audit opinion. 2. On March 8, 2012, a Special Meeting was held in which among other items, a Budget Reserve Policy was presented by staff. Budget reserve options were provided for Council's consideration containing minimum and maximum targets for reserve funds and identifying how such funds should be classified for GASB 54 reporting purposes. The City Council was requested to provide direction regarding funding amounts for each category and classification. Council concurred to refer this item to the Budget Ad Hoc Committee (Mayor Yu and Council member Blum) to meet with staff and return to the City Council with a recommendation. 3. On April 6, 2012, staff met with the Budget Ad Hoc Committee (i.e., Mayor Yu and Council member Blum) and discussed the elements for General Fund Reserves. There were also a number of occasions between March 8t" and May 1St that individual, informal discussions occurred with both Mayor Yu and Council member Blum regarding minimum and maximum ranges. For ease of administration and for accounting and reporting purposes of this reserve policy, it was suggested by staff, and City Council May 15, 2012 Page 2 the Budget Ad Hoc Committee members concurred, that one reserve level or dollar amount be brought forward for approval by the City Council. 4. On April 17, 2012, the City Council received and filed the Comprehensive Annual Financial Report (CAFR) at June 30, 2011, and Fund Balances were reported and classified in accordance with GASB 54, as a formal policy had yet to be adopted by the City. 5. On May 1, 2012, the City Attorney and Administrative Services Director recommended to the City Manager, that for ease of clarity, the adoption of the GASB 54 Fund Balance Policy and the Budget Reserve Fund Balance requirements to be adopted by Ordinance (as recommended by the Budget Ad Hoc Committee), should be considered separately as each proposed action has a different objective. The GASB 54 is a fund balance classification and financial reporting mandate only and is recommended to be adopted by policy only. The Budget Reserve Fund Balance requirements address how General Fund Reserves can and cannot be spent and the requirements for the Reserves should be adopted by Ordinance. Further the proposed Budget Reserve Fund Balance Requirements is intended for the General Fund only and GASB 54 must address all funds. 6. On May 4, 2012, staff met with the Budget Ad Hoc Committee (i.e., Mayor Yu and Council member Blum) to discuss the merits of separating the GASB 54 Fund Balance Policy and the Budget Reserve Fund Balance requirements. The City Council Budget Ad Hoc Committee concurred with staffs recommendation. ANALYSIS; In order to provide clarity and transparency to all accounting and budgeting policies, after careful consideration by staff and the City Council Budget Ad Hoc Committee on May 4, 2012, it is recommended that the City Council consider the GASB 54 Policy and the Budget Reserve Fund Balance requirements separately. This staff report is only recommending adoption of the City of Temple City's GASB 54 Policy. The Budget Reserve Policy will come forward under a separate action. In order to be in compliance with the Government Accounting Standards Board (GASB), the City Council is requested to adopt the provisions of GASB 54 by Policy. As outlined in the Policy, the definition of Fund Balances and the categories are: Fund Balance - All financial assets less liabilities normally expected to be liquidated with current financial resources. The following are categories of fund balance: a. Nonspendable Amounts that cannot be spent because they are either (a) not in a spendable form City Council May 15, 2012 Page 3 or (b) legally or contractually required to be maintained intact. The "not in spendable form" criterion includes items that are not expected to be converted into cash (e.g., inventories and prepaid amounts). This also includes long-term loans and notes receivable and property held for resale. However, if the use of the proceeds from the collection of those receivables or from the sale of those properties is Restricted, Committed, or Assigned, then they should be included in the appropriate fund balance classification (Restricted, Committed, or Assigned), rather than Nonspendable Fund Balance. The corpus (or principal) of a permanent fund is an example of an amount that is legally or contractually required to be maintained intact b. Restricted Except as provided for in the Nonspendable Fund Balance definition, amounts that are restricted to specific purposes should be reported as Restricted Fund Balance. Fund balance should be reported as restricted when constraints placed on the use of resources are either: (a) externally imposed by creditors, grantors, contributors, or regulations of other governments; or (b) imposed by law through constitutional provisions or enabling legislation. c. Committed Amounts that can only be used for the specific purposes pursuant to constraints imposed by formal action of the adoption of a Resolution, the government's highest level of decision-making authority should be reported as Committed Fund Balance. Those Committed amounts cannot be used for any other purpose unless the government removes or changes the specified use by adoption of a Resolution. Committed Fund Balance also incorporates contractual obligations to the extent that existing resources in the fund have been specifically committed for use in satisfying those contractual requirements. d. Assigned Amounts that are constrained by the government's intent to be used for specific purposes, but are neither Restricted nor Committed, should be reported as an Assigned Fund Balance, except for stabilization arrangements which will be reported as restricted or committed or unassigned. Intent can be expressed by (a) the governing body itself or (b) a body (Ad Hoc Budget Committee) or official to which the governing body has delegated the authority to assign amounts to be used for specific purposes. By adoption of this Policy, it is recommended by the Budget Ad Hoc Committee (Mayor Yu and Councilmember Blum) the City Council delegates the authority to the City Manager to assign amounts to be used for specific purposes. Both the Committed and Assigned Fund Balance classifications include amounts that have been constrained to being used for specific purposes by actions taken by the government itself. Assigned Fund Balance includes (a) all remaining amounts (except for negative balances) that are reported in governmental funds, other than the general fund, that are not classified as City Council May 15, 2012 Page 4 Nonspendable and are neither Restricted nor Committed and (b) amounts in the general fund that are intended to be used for a specific purpose. A comparison of actions required to Commit or Assign Fund Balances is presented for clarification and transparency: Committed Assigned A decision to use funds for a specific purpose requires action of governing Yes No body Formal action of governing body is necessary to impose, remove or modify this constraint and formal action has Yes No taken place before end of reporting period e. Unassigned Unassigned fund balance is the residual classification for the general fund. This classification represents fund balance that has not been assigned to other funds and that has not been Restricted, Committed, or Assigned to specific purposes within the general fund. The general fund should be the only fund that reports a positive Unassigned Fund Balance amount. In other governmental funds, if expenditures incurred for specific purposes exceeded the amounts Restricted, Committed, or Assigned to those purposes, it may be necessary to report a negative Unassigned Fund Balance Additional considerations for policy include: 1. The authorization level for committing Fund Balance is established by the City Council. Formal action of the City Council will be defined as an adoption of a Resolution, taking place at a publicly noticed meeting; 2. The City Council delegates the authority of the City Manager to assign amounts to be used for specific purposes; and 3. The City Council will undergo an annual reaffirmation process prior to the fiscal year- end, to review the Restricted, Committed and Assigned amounts to be reported as a result of previous actions in the fiscal year in accordance with the adopted Policy, to ensure they accurately reflect the City Council's desired Fund Balance classifications. As part of the reaffirmation process, the City Council will review all levels of Fund Balance and determine what action, if any, is needed to modify the existing Fund Balance levels or to leave them as is. City Council May 15, 2012 Page 5 CONCLUSION: In order to receive and unqualified or "clean" opinion on the City's Comprehensive Annual Financial Report (CAFR) by the independent auditors (i.e., Vasquez and Company, LLP) the City must be in compliance with the Government Accounting Standards Board issued Statement No. 54, "Fund Balance Reporting and Government Fund type Definitions" (GASB 54). As part of the compliance the City must adopt a policy implementing GASB 54. Adoption of the attached policy is recommended in order to ensure an unqualified opinion. FISCAL IMPACT: This action does not have an impact on the Fiscal Year (FY) 2011-12 City Budget. ATTACHMENT: A. City of Temple City GASB 54 Policy CITY OF TEMPLE CITY FUND BALANCE POLICY PURPOSE: Attachment "A" The purpose of this policy is to classify current fund balance categories to be accordance with the fund balance classifications contained in the reporting requirements of Statement 54 of the Government Accounting Standards Board (GASB) effective June 15, 2010. The elements of the policy are created by the City of Temple City for its own purposes and may, therefore, be revised by the City as needed in the future. STATEMENT OF POLICY: The following classifications of Fund Balance are established in conformance with GASB 54. a. Nonspendable fund balance b. Restricted fund balance c. Committed fund balance d. Assigned fund balance e. Unassigned fund balance The authorization level for committing is established by the City Council. Formal action of the City Council will be defined as an adoption of a Resolution taken at a publicly noticed meeting. The City Council will undergo an annual reaffirmation process prior to the fiscal year- end, to review the Restricted, Committed and Assigned amounts to be reported as a result of previous actions in the fiscal year in accordance with the adopted Policy, to ensure they accurately reflect the City Council's desired Fund Balance classifications. As part of the reaffirmation process, the City Council will review all levels of Fund Balance and determine what action—if any—is needed to modify the existing Fund Balance levels or to leave them as is. DEFINITIONS AND REPORTING: Fund Balance is defined as all financial assets less liabilities normally expected to be liquidated with current financial resources. The following are categories of fund balance: a. Nonspendable The Nonspendable Fund Balance classification includes amounts that cannot be spent because they are either (a) not in a spendable form or (b) legally or contractually required to be maintained intact. The "not in spendable form" criterion includes items that are not expected to be converted into cash (e.g., inventories and prepaid amounts). This also includes long-term loans and notes receivable and property held for resale. However, if the use of the proceeds from the collection of those receivables or from the sale of those properties is Restricted, Committed, or Assigned, then they should be included in the appropriate fund balance classification (Restricted, Committed, or Assigned), rather than Nonspendable Fund Balance. The corpus (or principal) of a permanent fund is an example of an amount that is legally or contractually required to be maintained intact b. Restricted Except as provided for in the Nonspendable Fund Balance definition, amounts that are restricted to specific purposes, should be reported as Restricted Fund Balance. Fund balance should be reported as restricted when constraints placed on the use of resources are either: (a) externally imposed by creditors, grantors, contributors, or regulations of other governments or (b) imposed by law through constitutional provisions or enabling legislation. c. Committed Amounts that can only be used for the specific purposes pursuant to constraints imposed by formal action of the adoption of a Resolution, the government's highest level of decision-making authority should be reported as Committed Fund Balance. Those Committed amounts cannot be used for any other purpose unless the government removes or changes the specified use by adoption of a Resolution. Committed Fund Balance also incorporates contractual obligations to the extent that existing resources in the fund have been specifically committed for use in satisfying those contractual requirements. d. Assigned Amounts that are constrained by the government's intent to be used for specific purposes, but are neither Restricted nor Committed, should be reported as an Assigned Fund Balance, except for stabilization arrangements which will be reported as restricted or committed or unassigned. Intent can be expressed by 2 (a) the governing body itself or (b) a body ( Ad Hoc Budget Committee) or official to which the governing body has delegated the authority to assign amounts to be used for specific purposes. By adoption of this Policy, the City Council delegates the authority to the City Manager to assign amounts to be used for specific purposes. Both the Committed and Assigned Fund Balance classifications include amounts that have been constrained to being used for specific purposes by actions taken by the government itself. Assigned Fund Balance includes (a) all remaining amounts (except for negative balances) that are reported in governmental funds, other than the general fund, that are not classified as Nonspendable and are neither Restricted nor Committed and (b) amounts in the general fund that are intended to be used for a specific purpose. Comparison: Committed vs. Assigned Committed Assigned A decision to use funds for a specific purpose requires action of governing Yes No body Formal action of governing body is necessary to impose, remove or modify this constraint and formal action has Yes No taken place before end of reporting period e. Unassigned Unassigned fund balance is the residual classification for the general fund. This classification represents fund balance that has not been assigned to other funds and that has not been Restricted, Committed, or Assigned to specific purposes within the general fund. The general fund should be the only fund that reports a positive Unassigned Fund Balance amount. In other governmental funds, if expenditures incurred for specific purposes exceeded the amounts Restricted, Committed, or Assigned to those purposes, it may be necessary to report a negative Unassigned Fund Balance