GASB Statement No. 54: Fund Balance and Governmental Fund Types

1. GASB Statement No. 54: Fund Balance and Governmental Fund Types Joseph J. Welch, CPA Partner Purvis Gray & Company LLP Sarasota, Florida

2. GASB #54, paragraph 55……. Those users want to know about the character of residual amounts. They want to know the extent to which the use of amounts reported in governmental funds is constrained and how binding those constraints are. Are they enforceable by parties external to the government? Does the government itself have the ability through some specified level of due process to remove or modify the constraints? Or are they less-binding or even nonbinding constraints that are simply indications of management's intent to use resources for specific purposes, with management having the power to change their intentions through a less rigorous process?

3. Effective date Display and disclosure Starting for the fiscal period ending June 30, 2011. Earlier application encouraged – (Too late) Will need to address in FY11 Budget! Statistical section Retroactive implementation encouraged, but not required (provide explanation if amounts not restated)

4. Why GASB Statement No. 54? • To improve the consistency and usefulness of fund balance information…..

5. Focus of classification “The extent to which the government is bound to honor constraints on the specific purposes for which amounts in those funds can be spent” (GASB Statement No. 54, paragraph 5)

6. What Does it Change/Clarify? • Fund balance presentation – fund level – governmental funds • Definitions for governmental funds • May no longer be able to use certain “activity-focus” special revenue funds

7. What Else Does it Require? • Requires disclosure of your policies and procedures over committing or assigning fund balances – i.e., Who says it is (reserved) for this? • TRANSPARENCY of Fund Balances

8. New Fund Balance Classifications The classification hierarchy is “based primarily on the extent to which the government is bound to honor constraints on the specific purposes for which amounts…can be spent” • Nonspendable • Restricted • Committed • Assigned • Unassigned Essentially what is now reserved Essentially what is now designated Essentially what is now unreserved

9. Fund Balance Presentation – Old Method • Reserves = unavailable or legally restricted • Legally restricted reserves were not shown unless they were “narrower than the purpose of the fund” • In practice, generally meant an external restriction (as opposed to self-imposed) • Also included certain encumbrances (unavailable) • Reserves could create a negative unreserved

10. Fund Balance Presentation – Old Method • Unreserved = designated or undesignated • Designations represented “management’s tentative spending plans” • Generally should reflect actual spending plans approved by at least senior management • Reflected self-imposed limitations • Designations cannot cause unreserved/undesignated to be negative

11. Fund Balance Presentation –New Method • Nonspendable • Spendable (header not used) – Classifications reflect a hierarchy, indicating the relative strength of the constraints: • Restricted • Committed • Assigned • Unassigned

12. 1. Nonspendable Fund Balance • Not in spendable form • Cannot ever be spent (e.g., supplies inventories) • Cannot currentlybe spent (e.g., long-term loans receivable and nonfinancial assets held for resale) • Not spendable legally • Legally or contractually must be kept intact (e.g., principal of an endowment or revolving loan fund)

13. 2. Restricted Fund Balance • Same definition used now for restricted net assets • Constraint on use must be legally enforceable, and was either: • Externally imposed by creditors, grantors, contributors, or laws or regulations of other governments, or • Imposed through constitutional provisions or enabling legislation

14. 2. Restricted Fund Balance • Imposed Through Enabling Legislation: • The government can mandate a payment • From external resource providers. • It includes a legally enforceable requirement • That the resources be used only for the specified purpose

15. 3. Committed Fund Balance • Use constrained by limitations that the government “imposes upon itself” through • A formal action (e.g., statute, ordinance, probably resolution) – before year-end • Of the highest level of decision making authority (governing board) • Which can only be reversed by the same type of formal action, • And commits the resource to a “specified purpose.”

16. Difference BetweenRestricted and Committed • Par. 74 – Basis for Conclusions: • With restricted, there is an (implicit) “contract” with the resource providers, that the resources will only be expended for the specified purpose • And it is legally enforceable – committed is not • Legally enforceable may be a gray area – you won’t be able to test it

17. Difference BetweenRestricted and Committed • Legally enforceable means: • The government can be compelled by an external party – e.g., citizens, public interest groups, the judiciary – to use the resources for the specified purpose • The distinction on enabling legislation may be whether the purpose restriction was in the authorizing (e.g., impact fees) or enabling legislation (e.g., local fee or charge)

18. 4. Assigned Fund Balance Intended use of resources – general fund Established by the governing body itself or by a body or official delegated by the governing body Less formality necessary than for a commitment Action may be taken after YE, but before issuance of financial statements Subsequent years’ budget deficit Residual category in SRFs, CPFs and DSFs (unless negative - unassigned)

19. Difference BetweenCommitted and Assigned • Committed requires: • The commitment be made by the governing body • The action be formal and reversible only by the same action • A specified purpose • Assigned really only for specified purposes in the general fund – allows for management’s intentions • In other funds, assigned is simply a residual for amounts that don’t meet the committed criteria

20. 5. Unassigned Fund Balance Only appropriate for: The general fund Negatives in other governmental funds - take assigned to zero first

21. Special Case - Encumbrances (Only if they don’t lapse…) If Paid From Restricted, committed or Assigned Revenues: Put in that classification – don’t separately state If Not Identifiable: Could be committed or assigned

22. Recap - Classification of Fund Balance Nonspendable Form or legal limitation Restricted Externally enforceable limitations Committed Self-imposed limitations (not externally enforceable) Assigned Intended use Unassigned Residual

23. Examples Gas Taxes – Restricted by law/reg. of other government Infrastructure surtax – same Bond money – restricted by external party (creditor) Grants – restricted by external party (grantor) Road impact fee – restricted by enabling ordinance – legally enforceable Building permit fees – restricted by statute Alarm fees for police services – committed by enabling ordinance – probably not legally enforceable Garbage collection fees – no requirement to spend – unassigned Parks fees – no requirement to spend on parks – unassigned

24. Examples MSTU – statutorily must be spent in unincorporated area – committed to public safety General fund grant match transferred into SRF per budget – assigned (residual) General fund supplemental funding of road project – authorized in budget and CIP – assigned b/c the budget/CIP can expire Balance in general capital projects – assigned, absent formal governing board approval and specified purpose General fund allocation for a municipal pool – assigned Encumbrance to be paid from a restricted, committed or assigned resource – restricted, committed or assigned (not separately stated)

25. Examples Encumbrance (source unclear) – committed or assigned, depending on who approved Stabilization arrangement (rainy day fund) that meets the restricted criteria – restricted Stabilization arrangement that meets the committed criteria – committed Subsequent years’ budget deficit – general fund - assigned

26. Multiple Categories A fund could have multiple categories Will need to adopt a “Flow Assumption” Already have restricted v. unrestricted Within unrestricted, identify liquidation order for: Committed Assigned Unassigned If no flow assumption, defaults to above order

27. Fund Balance Presentation Total by major classification (nonspendable, restricted, committed, assigned, unassigned) Further detail on face permitted (or disclosed in Notes)

28. Disclosures The process through which constraints are imposed for committed and assigned And how they are modified or eliminated “The reader should be able to identify residual balances and to what level they are constrained” Cite the Ordinance/Policy Name the Official’s position

29. Disclosures Detail breakdown of each classification (if not on face) Expand policy on flow assumption For stabilization arrangements – the authority, req’ts for additions, conditions for spending, ending balance (even if not displayed) Minimum fund balance policies Encumbrances by major fund and total non-major (in commitment note) Purpose of each major SRF and which revenues are reported therein

30. Fund type definitions

31. Special Revenue Funds “…to account for the proceeds of specific revenue sources … that are restricted or committedto expenditure for specified purposes(other than DSFs or CPFs).” Old definition really just clarified But may cause the disqualification of certain “activity focus” SRFs

32. Special Revenue Funds Restricted or committed proceeds must comprise a “substantial portion of the inflows” The proceeds must be recorded directly to this fund (not transferred in)

33. Capital Projects Funds Old: ...to account for financial resources to be used for the acquisition or construction of major capital facilities…” New: ...to account for resources that are restricted, committed, or assigned to expenditure for capital outlays”

34. Debt Service Funds ...to account for resources that are restricted, committed, or assigned to expenditure for principal and interest” When legally mandated, or For financial resources being accumulated for principal and interest Can be restricted, committed or assigned

35. SRF’s That Don’t Meet the Definition GASB prefers you move the activity to the general fund Could move to an enterprise fund (change MF and BOA) Could roll into another SRF Could adopt an ordinance/policy to commit the resources (before FYE 11)

36. Consistency with Government-Wide SONA Fund restricted +/- accrual adjs = EW restricted Fund committed/assigned/unrestricted (+ ISFs) +/- accrual adjs = EW unrestricted Fund nonspendable (available) = “follow the rest of the fund” Fund nonspendable (legally) = EW restricted

37. Will GASG #54 Work? Improve the usefulness of governmental fund balance information Common definition of restricted enhances consistency and avoids confusion between fund level and EW Clearer classification definitions enhances benchmarking Needed info re: “level of constraints” on fund balance for users

38. What to do Tomorrow Review SRF’s for continued qualification Do a practice run on prior year fund balances for the new classifications Prepare practice note disclosures Review/shore up policies for committed and assigned amounts, stabilization arrangements Generate PY info for the statistical section, if you want to apply retroactively Get WPs ready for your auditors

39. To Restrict or Not Restrict? It is no longer a question Be careful what you wish for

40. The End Joe Welch, Partner Purvis Gray & Company jwelch@purvisgray.com (941) 907-0350