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Home My WebLink About11-322JULY 13, 2011 11 -322 RESOLUTION (CARRIED 7 -0 LOST LAID OVER WITHDRAWN ) PURPOSE: ESTABLISH A FUND BALANCE POLICY INITIATED BY: FINANCE / LONG RANGE FINANCE COMMITTEE WHEREAS, it is desirable to establish, as policy, the Council's intent to maintain a prudent level of financial resources to ensure that the City continues to operate in an effective and efficient manner; and WHEREAS, a written policy will provide all stakeholders, including citizens, staff, rating agencies, and independent auditors, with an understanding of the fund management policy of the City; and WHEREAS, establishment of the proposed policy will enable the City to mitigate current and future risks against revenue shortfalls or unanticipated expenditures and ensure stable tax rates; NOW, THEREFORE, BE IT RESOLVED by the Common Council of the City of Oshkosh that there is established a Fund Balance Policy (per Attachment A) for the General Fund of the City. City of Oshkosh Finance Department 215 Church Ave., PO Box 1130 Oshkosh, WI 54903 -1130 O.IHKOf H (920) 236 -5005 (920) 236 -5039 FAX ON THE WATER MEMORANDUM DATE: July 13, 2011 TO: Council Members FROM: Harold Buchholz, Chair Long Range Finance Committee RE: Recommendation to Establish a Fund Balance Policy As part of its mission to research, study, and address the long range financial issues of the City, the Long Range Finance Committee has been evaluating the creation of a Fund Balance Policy for the General Fund of the City. As part of this study, the Committee has completed the following: • Determined the need for a formal Fund Balance Policy, • Researched Best Practices regarding all facets of Fund Balance policies, • Reviewed the Fund Balance Policies of other cities and governments across the Country, • Considered the newly establish Governmental Accounting Standards Board Statement, GASB 54, Fund Balance Reporting and Governmental Fund Type Definitions, and • Drafted a prudent, fiscally responsible policy for the Council to consider. The purpose of the attached policy is to acknowledge and formalize current practice and ensure continuity of responsible fund management. This policy ensures that the City maintains a prudent level of financial resources to operate in an effective and efficient manner. It also provides written guidelines so that all stakeholders, both internally and externally, understand the fund management policy of the City. Below are the details of the main features of the policy and the reasons they are critical to the policy: Minimum Unassigned Fund Balance (16 %) — 16% is equal to two months of General Fund Revenue, including general service revenues as well as debt service revenues. This level was chosen as a responsible and prudent level that is commonly used as a benchmark across the nation by other entities. The acceptable range is typically defined as two to three months of revenues. In addition, rating agencies recognize this range as an acceptable level in assuring continued financial stability. • Required Replenishment — Replenishment is a key to maintaining an acceptable level of Unassigned Fund Balance over time. This was included to ensure that the City fulfills the goal of the policy as choices need to be made to utilize the Unassigned Fund Balance for allowed needs. • Monitoring — It is the intent of this section to ensure that this policy does not get out of date. Regular monitoring and reviewing of the policy will ensure that the policy remains pertinent and functional over time and as specific events occur. As noted above, this policy illustrates that the City practices prudent financial management and planning, and allows the City to protect against reducing service levels. It also enables the City to mitigate current and future risks against revenue shortfalls or unanticipated expenditures and ensure stable tax rates, something that is extremely critical especially in light of the current state budget and local conditions. To that end, the Committee recommends that the Council adopt the attached Fund Balance Policy. We strongly believe that passage of this policy is in the best interest of the citizens of the City of Oshkosh as we move into the future. ATTACHMENT A CITY OF OSHKOSH FUND BALANCE POLICY GENERALFUND DRAFT — July 7, 2011 Policy Statement The establishment of a formal policy governing the purpose and acceptable parameters of the amount of Unassigned Fund Balance the City Maintains in the General Fund is an effective contribution to the financial management practices of the City of Oshkosh. A formally adopted policy eliminates ambiguity regarding what constitutes appropriate levels and uses of the Unassigned Fund Balance, and makes the policy clear to all stakeholders. Purpose The purpose of this Fund Balance policy is to ensure that the City maintains a prudent level of financial resources to operate in an effective and efficient manner. It provides written guidelines so that all stakeholders, both internally and externally, understand the fund management policy of the City. This policy illustrates that the City practices prudent financial management and planning, and allows the City to protect against reducing service levels. It also enables the City to mitigate current and future risks against revenue shortfalls or unanticipated expenditures and ensures stable tax rates. Scope This policy applies to the General Fund of the City of Oshkosh which is under the Control of the City Council. This policy is in accordance with the Governmental Accounting Standards Board (GASB) standards. Definitions Fund Balance Fund Balance is the difference between fund assets and fund liabilities. Fund Balance is also referred to as net assets. A positive Fund Balance means there are more assets than liabilities; a negative Fund Balance means there are more liabilities than assets. Unassigned Fund Balance Unassigned Fund Balance is the portion of the Fund Balance that is available for any purpose. These amounts are not constrained in any way, and are reported only in the General Fund. Assigned Fund Balance Assigned Fund Balance is the portion of the Fund Balance that is intended to be used for a specific purpose. Amounts reported as assigned should not result in a deficit in the Unassigned Fund Balance. Committed Fund Balance Committed Fund Balance is the portion of the Fund Balance that is constrained to specific purposes by a government itself. These amounts cannot be used for other than the stated purpose unless the government takes the same highest level action to remove or change the constraint. Page 1 Restricted Fund Balance Restricted Fund Balance is the portion of the Fund Balance that is constrained to specific purposes by external parties (such as grantors, bondholders, and higher levels of government), constitutional provisions, or by enabling legislation. These amounts cannot be used for other than the stated purpose. Non - spendable Fund Balance Non - spendable Fund Balance is the portion of the Fund Balance that cannot be spent due to its form (such as inventories and prepaid amounts) or is required to remain in tact (such as the corpus of an endowment). Operatinq Expenditures Operating expenditures are uses of financial resources for personnel, supplies, services and materials, and exclude capital expenditures, debt service, and transfers to other funds. Objective The Objective of this policy is to reaffirm that the Unassigned Fund Balance is a reserve fund that will only be used for infrequent, one -time expenditures that could not be planned for in advance. In addition, the Unassigned Fund Balance will support the City's financial position and credit rating. The objective of the City of Oshkosh is to maintain the established Unassigned Fund Balance and refrain from using it for operating expenditures (thereby creating a balanced budget on an annual basis), accessing it only when necessary and replenishing any amounts that are used in a reasonable time frame. Target l Goal Balance The City of Oshkosh will maintain a minimum Unassigned Fund Balance of 16% (approximately two months) of the budgeted annual General Fund Revenue. The General Fund Revenue includes general and debt service revenues of the General Fund. Funding / Replenishment If, at any time, the Unassigned Fund Balance is lower than the above stated amount, the Council, by direct vote within the next budgetary cycle, shall implement a plan to rebuild the Unassigned Fund Balance to the minimum level. This may include: increasing the annual budget to replenish the fund (over a period of one or more years) or applying remaining unexpended general fund resources at the end of the fiscal year. Monitoring It shall be the responsibility of the Director of Finance to monitor the Fund Balance on an ongoing basis and report to the City Manager and the Council material deviations. In addition, this policy will be reviewed at least every five years or when a material event occurs to warrant review. Material events include: a substantial change in revenues or expenditures, a substantial change in debt obligations, a change in the City's bond rating, and any other substantial event. Page 2