Marcia Taylor, CPA, CGFM Rob Lent, CPA, CFE, CGFM Willy McKain, CPA Wednesday, July 22, 2009

Need for the Project Fund balance – widely recognized as one of most used elements in financial statements What is available to be spent? What is available to pay debt or other long term obligations?

Issues with Fund Balance Information Level of action Plopping Confusion on terminology Lack of comparability “Available” masked

Issues with Fund Balance Information

Objective Do current reporting requirements adequately meet needs of users? Assess financial flexibility Assess liquidity Clarify distinctions between reserved and un, reserved and net assets

Fund Definition Component FB affected by funds Lack of clarity? SRF – what resources? CPF – what projects? Activity versus revenue reporting

Issues for Project Plan Decisions made by users Types of information Components Display (versus disclosure) Clarify fund definitions

History of Project Deliberations during MFBA – resistance by users/preparers 1999 – Statement 34 – proposed and withdrawn Project in 2002, research 2003 Agenda December 2003 after 34 issued Additional research on FB Net Assets (46) issued

History of Project ITC October responses ED April responses, 26 field test Task force Final February 2009

Scope and effective date Scope Changes how fund balance is presented Clarifies use of governmental fund types Effective date Fiscal period ending 6/30/11 Early implementation encouraged Retroactive reporting encouraged for stats

New Guidance Fund balance classification

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 #54, para 5)

Components of fund balance Five categories Nonspendable Restricted Committed Assigned Unassigned Not all will always be present

Nonspendable fund balance Not in spendable form Cannot ever be spent Cannot currently be spent Legally or contractually required to be maintained intact

Categories representing spending constraints Three categories Restricted fund balance Committed fund balance Assigned fund balance No requirement that constraint be narrower than the purpose of the fund

Restricted fund balance Constraints on purpose/circumstances of spending that are legally enforceable by outside parties Creditors Grantors and contributors Law or regulations of other governments Constitutional provisions/enabling legislation Same rules now used to classify restricted net assets

Committed fund balance Constraints on purpose/circumstances of spending imposed by government itself Formal action Means will differ among governments Highest level of decision-making authority Binding unless removed in the same manner Action taken prior to the end of the reporting period Amount can be determined at a later date

Assigned fund balance Intent to use resources for a specific purpose Government body Subordinate high-level body or official delegated to make such assignments in accordance with policy established by the governing body Governing body’s intentions not management’s Never in excess of total fund balance less its nonspendable, restricted and committed components

Unassigned fund balance Residual balance reported in general fund The use of some other fund type presumes that all of the resources reported in that fund are either restricted, limited, or assigned Also used to report deficits in other fund types

Components of fund balance Nonspendable fund balance (inherently nonspendable) Not in spendable form or requirement to maintain intact Restricted fund balance (Externally enforceable limitations on use) Outside parties Constitutional provisions or enabling legislation Committed fund balance (Self-imposed limitations) Formal action by end of period Highest level of decision making Assigned fund balance (Limitation resulting from intended use) Less formal action Highest level of decision making or designated body or official Unassigned fund balance (Residual net resources)

Stabilization (“rainy day”) funds Resources that can be spent only if certain specific circumstances occur Use of special revenue fund for this purpose not permitted Report in general fund Restricted or committed Presumption that specific circumstances in which spending is permitted “would not be expected to occur routinely” Never classified as assigned

Encumbrances Note disclosure (commitments) Categorization for display purposes dependent on nature of constraint

New Guidance Governmental fund type definitions

Fund type definitions Special revenue funds Capital projects funds

Special revenue funds History Designed for specific revenue sources that are legally restricted to expenditure for specified purposes Often used for resources that have been “earmarked,” regardless of source. Four issues in practice

1. Specified purposes alone Two criteria in old definition Specific revenue sources Specific purposes Is compliance with the specified purposes criterion sufficient? Not uncommon in practice Sometimes no specified revenue sources, only specified purposes

2. Transferred resources Are governments free to transfer in additional resources for same purpose as the specific revenue source?

3. Legally restricted Include resource restrictions imposed by the government itself?

4. Purpose Is a constraint on the circumstances in which resources can be spent equivalent to a constraint on the purpose for which they can be spent? Stabilization arrangements

Resolution (GASB 54) New definition “Special revenue funds are used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specified purposes other than debt service or capital projects.”

1. Specified purposes sufficient? No “The term proceeds of specific revenue sources establishes that one or more specific restricted or committed revenues should be the foundation for a special revenue fund.”

2. Free to transfer in additional resources for same purpose? Yes Only so long as the government expected the core revenue source(s) to “comprise a substantial portion of the inflows reported in the fund.”

3. Include resource restrictions imposed by the government itself? Yes, if the resources qualify as committed fund balance

4. Is constraint on circumstances equivalent to constraint on purpose? Yes (i.e., stabilization arrangements)

Prior definition: capital projects funds …to account for financial resources to be used for the acquisition or construction of major capital facilities (other than those financed by proprietary funds or in trust funds for individuals, private organizations, or other governments).” One issue – limited to capital facilities?

Resolution New definition “Capital projects funds are used to account for and report financial resources that are restricted, committed, or assigned to expenditure for capital outlays including the acquisition or construction of capital facilities and other capital assets).” Not limited to capital facilities

General fund Prior definition “To account for all financial resources except those required to be reported in another fund” Never intended to limit the ability to use another fund type voluntarily Use required only when a primary government is incorporating the general fund of a blended component unit Term required dropped from the definition

Disclosure Committed fund balance Government’s highest decision-making authority Formal action required to establish, modify or rescind a commitment Assigned fund balance Body or official authorized to make assignments Policy established by the governing body pursuant to which that authorization is given.

Disclosure (cont.) Flow assumptions Whether restricted or unrestricted resources are considered to be spent first when both are available for the same purpose Order in which committed, assigned, and unassigned resources are considered to be spent when they are available for the same purpose

Disclosure (cont.) Stabilization arrangements Authority for establishing Requirement for additions Conditions that need to be met for spending to be permitted. Minimum fund balance requirements Description of the policy that sets forth the details of the requirement, including the action taken to establish it.

Disclosure (cont.) Special revenue funds For each major special revenue fund Purpose of the fund Revenues and other resources reported

Question 1 Which of the following would be reported as restricted fund balance? A. Prepaid rent B. Endowment C. Both (A) and (B) D. None of the above

Question 2 Which of the following would never be a positive balance in a special revenue fund? A. Restricted B. Limited C. Assigned D. Unassigned

Question 3 How would a limitation on spending imposed by a resource contributor be categorized? A. Restricted B. Committed C. Assigned D. (A) or (B)

Question 4 The governing body of a city with a 6/30 FYE votes early in July to require that specified resources be spent only for a specified purpose. How should that constraint be reflected in fund balance? A. Restricted B. Committed C. Either (A) or (B) D. None of the above

Question 5 What is the key difference between restricted and committed? A. Duration B. Form C. Enforceability D. Focus on availability

Question 6 Assigned fund balance is designed to reflect the intent of: A. Management B. Governing body C. Either (A) or (B)

Question 7 How may a stabilization (“rainy day”) fund be reported? A. Special revenue fund B. Restricted (general fund) C. Committed (general fund) D. Assigned (general fund) E. Either (B) or (C)

Question 8 The basis for establishing a special revenue fund should be: A. Earmarked resources B. Revenue sources C. Either (A) or (B)

Question 9 A capital projects fund may be established to account for the acquisition of which of the following? A. Fire trucks B. Building improvements C. Equipment D. None of the above E. All of the above

Question 10 The term nonspendable fund balance essentially covers the same items encompassed by the traditional term reserved fund balance. TrueFalse

Practitioner’s Approach to implementing GASB 54 Need to Read and understand the GASB 54 pronouncement Recommended reading the GFOA book by Stephen Gauthier: “The New Fund Balance”

Practitioner’s Approach to implementing GASB 54 Have to understand the new Fund balance components and what the rules are for each category to make sound judgment on their classifications. Need to know the action steps necessary to obtain appropriation authorization for amounts to be presented in the correct category.

Practitioner’s Approach to implementing GASB 54 Another challenge – we are creatures of habit and now have to let go of the current fund balance terminology we have become so familiar with and accustomed to: I. Reserved II. Unreserved a. Designated b. Undesignated

Practitioner’s Approach to implementing GASB 54 Have to now learn the new Components of Fund balance : I.Nonspendable II.Restricted III.Committed IV.Assigned V.Unassigned

Practitioner’s Approach to implementing GASB 54 Helpful Reminder: Nobody Really Cares About Us I.Nonspendable II.Restricted III.Committed IV.Assigned V.Unassigned

Practitioner’s Approach to implementing GASB 54 Mt. Lebanon 2007 & 2008 examples of Fund balance under current rules and then recast to convert to the new GASB 54 categories. Allegheny County example of 2007 fund balance to new GASB 54 standard.

Marcia, Rob & Willy Thank You! Questions?