R 4391 RESOLUTION NO. 4391
A RESOLUTION OF THE CITY COUNCIL OF THE CITY
OF ARROYO GRANDE ADOPTING GOVERNMENTAL
ACCOUNTING STANDARDS BOARD STATEMENT NO.
54 THAT INCORPORATES A FUND BALANCE POLICY
INCLUDING A GENERAL FUND PRUDENT RESERVE,
AUTHORIZING THE DIRECTOR OF ADMINISTRATIVE
SERVICES TO IMPLEMENT THE FUND BALANCE
POLICY AND DELEGATING THE CITY MANAGER WITH
THE AUTHORITY TO ASSIGN AMOUNTS TO BE USED
FOR SPECIFIC PURPOSES PURSUANT TO GASB
STATEMENT NO. 54
WHEREAS, the Government Standards Accounting Board (GASB) has issued
Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions;
and
WHEREAS, GASB Statement No. 54 will modify the reporting of fund balance for
governmental funds and establishes a hierarchy of classifications for fund balance and
requires documenting certain financial policies, some of which require approval by City
Council; and
WHEREAS, staff has determined that compliance with GASB Statement No. 54 will
clearly define new fund balance classifications and identify authority and actions that
lead to committed and assigned fund balances; and
WHEREAS, the Fund Balance Policy (Exhibit A) complies with the requirements of
GASB Statement No. 54.
NOW, THEREFORE, BE IT RESOLVED that the City Council of the City of Arroyo
Grande hereby adopts the Governmental Accounting Standards Board Statement No. 54
that incorporates a Fund Balance Policy including a General Fund prudent reserve,
authorizing the Director of Administrative Services to implement the fund balance policy
and delegating the City Manager with the authority to assign amounts to be used for
specific purposes pursuant to GASB Statement No. 54.
On motion of Council Member Guthrie, seconded by Council Member Brown, and on
the following roll call vote, to wit:
AYES: Council Members Guthrie, Brown, Costello, Ray, and Mayor Ferrara
NOES: None
ABSENT: None
the foregoing Resolution was passed and adopted this 23 day of August 2011.
RESOLUTION NO. 4 /39
PAGE 2
TONY FE' ;. MAYOR
ATTEST:
KELLY W TMhE, CITY CLERK
APPROVED AS TO CONTENT:
STEVEN ADAMS, CITY MANAGER
APPROVED AS TO FORM:
TI THY J. MEL, CITY ATTORNEY
CITY OF ARROYO GRANDE
FUND BALANCE POLICY
Purpose:
This Fund Balance Policy establishes procedures for reporting fund balance
classifications, establishes prudent reserve requirements, and establishes a hierarchy of
fund balance expenditures. The policy also authorizes the Director of Administrative
Services to prepare financial reports, which accurately categorize fund balance per
Governmental Accounting Standards Board (GASB) Statement No. 54; Fund Balance
Reporting and Governmental Fund Type Definitions (GASB 54). Further, this policy is
established in order to provide a measure of financial protection for the City against
unforeseen circumstances and to comply with GASB 54. Unless otherwise authorized,
no other policy or procedure supersedes the authority and provisions of this policy.
I. Fund Balance Components
Fund balance is the difference between the assets and liabilities reported in a
governmental fund. GASB 54 establishes the following five components of fund
balance, each of which identifies the extent to which the City is bound to honor
constraints on the specific purposes for which amounts can be spent.
A. Non - Spendable Fund Balance
The non - spendable fund balance classification includes amounts that cannot be
spent because they are either (a) not in spendable form or (b) legally or
contractually required to be maintained intact. The "not spendable" criterion
includes items that are not expected to be converted to cash, for example,
inventories and prepaid amounts. It also includes the long term amount of loans
and notes receivable.
B. Restricted Fund Balance
The restricted fund balance classification includes amounts that reflect
constraints placed on the use of resources (other than non - spendable items) that
are either (a) externally imposed by creditors (such as through debt covenants),
grantors, contributors, or laws or regulations of other governments; or (b)
imposed by law through constitutional provisions or enabling legislation.
C. Committed Fund Balance
The committed fund balance classification includes amounts that can only be
used for specific purposes pursuant to constraints imposed by formal action of
the City Council. Those committed amounts cannot be used for any other
purpose unless the government removes or changes the specified use by taking
the same type of action (for example - legislation, resolution, ordinance) it
employed to previously commit those amounts. Committed fund balance should
also incorporate contractual
Fund Balance Policy - Exhibit A
obligations to the extent that existing resources in the fund have been specifically
committed for use in satisfying those contractual requirements.
D. Assigned Fund Balance
The assigned fund balance classification includes amounts that are constrained
by the government's intent to be used for specific purposes, but that are neither
restricted nor committed. Such intent to be established by (a) the governing
body itself or (b) a body or official to which the governing body has delegated the
authority to assign amounts to be used for specific purposes.
E. Unassigned Fund Balance
The unassigned fund balance classification includes amounts that do not fall into
one of the above four categories. 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 is the only fund that should report this category of fund balance.
The first chart below depicts the current versus the GASB 54 fund balance
classifications and the second chart further displays the new hierarchy under GASB
54.
Non - Spendable
Reserved
Restricted
Committed
Unreserved and Designated
Assigned
-- - -- ---- ---------------------------------------------
Unreserved and Undesignated Unassigned
e wwon"`9`r.G ?.
Non - Spendable Fund Balance Not in Spendable Form
Restricted Fund Balance Legally or Contractually Restricted
Committed Fund Balance
Unrestricted Fund Balance Assigned Fund Balance
Unassigned Fund Balance
Fund Balance Policy - Exhibit A
Page 2 of 5
II. Stabilization Arrangements (Prudent Reserve)
Per GASB 54, governments have the option to formally set aside unrestricted fund
balance amounts for use in emergencies, revenue shortages, or budget imbalances.
The authority to set aside such amounts can be established by statute, ordinance,
resolution, charter, or constitution. These amounts may be spent only if certain
specific circumstances exist. Stabilization amounts should be reported in the
general fund as committed. The notes to the financial statements disclose the
authority for establishing the arrangement, the requirement for additions to the
amount, the conditions under which the amounts may be spent, and the balance.
The attached General Fund Prudent Reserve (Attachment 1) satisfies the GASB 54
requirements.
Ill. Hierarchy of Spending Fund Balance
The City's current fund balance practice provides that restricted fund balance be
spent first when an expenditure is incurred for which both restricted and unrestricted
fund balance is available. Similarly, when an expenditure is incurred for purposes
for which amounts in any of the unrestricted classifications of fund balance can be
used; committed amounts are to spent first, followed by assigned amounts and then
unassigned amounts.
Fund Balance Policy - Exhibit A
Page 3 of 5
GENERAL FUND PRUDENT RESERVE
I. INTRODUCTION
City finances are comprised of various funds, which for legal purposes have to be
separated. For example, gas taxes have to be spent on street maintenance and
cannot be used to hire police officers. One fund over which the City Council may
exercise considerable discretion is the General Fund. It is also the fund used to
account for the receipt of general taxes such as property and sales taxes. Most
public safety services are also paid from the General Fund. Proposition 218 dictates
that taxes can only be raised by a vote of the electorate. As such, the City must
cautiously guard its General Fund to insure that expenses do not eclipse revenues.
A General Fund Prudent Reserve, otherwise known as a Stabilization Fund or
Emergency Reserves, would provide for severe economic downturns or major
unforeseen events (as determined by City Council action) where a significant portion
of revenues supporting critical basic operations are projected to decline for more
than two years, (the normal budget cycle), and such decline cannot be absorbed by
the operating departments or fund. In these events, the City will need to affect
reductions, consolidate operations, reprioritize critical programs or implement an
alternative revenue source. A General Fund Prudent Reserve will provide temporary
support to minimize the impacts to citizens who rely on these critical operations.
II. WHAT IS THE AMOUNT OF A FISCALLY PRUDENT RESERVE?
This amount varies from one Governmental entity to another. The City of Arroyo
Grande has established a formal minimum fund balance policy of 15% of
appropriations.
III. MEASUREMENTS TO DETERMINE PRUDENT RESERVES
Although finance professionals may not have the same answer as to what is a
prudent reserve, most agree on a set of parameters by which such a question could
be examined for a specific city. The need for reserves is determined primarily by the
degree of risk associated with revenues and revenue sources, and by the likelihood
of major contingencies and the amount of funds required to respond to them.
IV. OTHER FACTORS TO CONSIDER
Reserves Generate Investment Earnings to Fund Operations
An important, yet often overlooked consideration, when deciding on the level of
reserves is to examine what impact on operating revenue and programs would there
be if reserves were reduced or eliminated. Keep in mind that the reserve funds of
the City are invested. The estimated General Fund Prudent Reserve balance at
Fund Balance Policy - Exhibit A — Attachment 1
Page 4 of 5
June 30, 2010 is $3.2 million. If invested at two percent for a year, this generates
approximately $64,000 in investment earnings available for General Fund programs.
Appropriations from Prudent Reserve Balance
Once established, appropriations from the Prudent Reserve commitment can only be
made by formal City Council action. Generally, appropriations and access to these
funds will be reserved for emergency situations. Examples of such emergencies
include, but are not limited to:
• An unplanned, major event such as a catastrophic disaster requiring
expenditures over five percent of the General Fund adopted budget.
• Budgeted revenue taken over by another entity.
• Drop in projected /actual revenue of more than five percent of the General Fund
adopted revenue budget.
Should the Prudent Reserve commitment be used, and its level falls below the
minimum amount of as described herein, the goal is to replenish the fund within two
years.
V. CONCLUSION
It is important that the City maintain a prudent level of reserves. The City has
exposure to certain risk factors when looking at future revenues. What constitutes a
prudent level of reserves is different for each city. It has been noted that the current
reserves of the City currently serve in an endowment -like fashion that provide
General Fund operating income of approximately $64,000 in interest earnings, which
has been used to fund operations.
Fund Balance Policy - Exhibit A — Attachment 1
Page 5 of 5
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OFFICIAL CERTIFICATION
I, KELLY WETMORE, City Clerk of the City of Arroyo Grande, County of San
Luis Obispo, State of California, do hereby certify under penalty of perjury, that
Resolution No. 4391 is a true, full, and correct copy of said Resolution passed
and adopted at a regular meeting of the City Council /Redevelopment Agency of
the City of Arroyo Grande on the 23` day of August 2011.
WITNESS my hand and the Seal of the City of Arroyo Grande affixed this 24
day of August 2011.
KELLY W TM CITY CLERK