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Home My WebLink AboutAgenda - 11-09-2010 - 1ORANGE COUNTY • BOARD OF COMMISSIONERS ACTION AGENDA ITEM ABSTRACT Meeting Date: November 9, 2010 Action Agenda Item No. 1 SUBJECT: GASB Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions DEPARTMENT: PUBLIC HEARING: (YIN) No Financial Services ATTACHMENT(S): INFORMATION CONTACT: 1. PowerPoint -GASB 54 Fund Balance Reporting and Governmental Fund Type Frank Clifton, 919-245-2306 Definitions Clarence Grier, 919-245-2453 2. Draft Fund Balance Policy • PURPOSE: To discuss the implementation of Government Accounting Standards Board (GASB) Statement No. 54 Fund Balance Reporting and Governmental Fund Type Definitions, and the implications on the financial reporting of the County. BACKGROUND: Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet. This information is one of the most widely used elements of state and local government financial statements for analysis. One central importance of the credit reviews performed by municipal bond analysts; fund balance information also is used by oversight bodies, federal, state, county and local legislators to assess the financial heath of an organization. Additionally, financial statement users examine fund balance information to identify the available liquid resources. that can be used to repay long-term debt, reduce property taxes, add new governmental programs, expand existing ones, or enhance the financial position of the government. GASB has found that its usefulness and the value of fund balance information provided is significantly reduced by misunderstandings regarding the message that it conveys, and the inconsistent treatment and financial reporting practices of governments. In March 2009, in order to improve how fund balance information is reported and enhance its decision-usefulness, GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. CJ 2 The statement must be retroactively applied to July 1, 2010. Therefore, we must change our • fund balance categories and fund types to comply with the new standard. The new categories for the reporting of fund balance are as follows: ^ Nonspendable ^ Restricted ^ Committed ^ Assigned ^ Unassigned The General Fund is the only fund that can have unassigned fund balance. Additionally, the statement changed the definitions of the governmental fund type descriptions. The statement makes clear that special revenue funds are created only to report a revenue source (or sources) that is restricted or committed to a specified purpose, and that the revenue source should constitute a substantial portion of the resources reported in the fund. The capital project fund type has been clarified to focus on the broader, more consistently understood concept of capital outlays, and to better capture the breadth of capital activities in today's environment. Capital Reserve Funds will be reclassified and reported as either part of the General Fund, Debt Service Fund or Capital Projects Fund. We have determined that all of our capital reserve funds (County Capital Reserve and School • Capital Reserve) will be grouped for reporting purposes with their related capital project fund (County Capital and School Capital Funds). Governments are required to implement the new standard for fiscal years ending June 30, 2011. FINANCIAL IMPACT: There is not a financial impact of implementing the new accounting standard. RECOMMENDATION(S): The Manager recommends that the Board receives the information presented and advise staff on the implementing of the new standard and recommended fund balance policy. LJ 3 ,. :: GASB 54 ._ FUND BALANCE REPORTING AND ~~~~` ~~ ~~~~ G4VERNMEt~TAL FUND TYPE DEFINITIdNS Clarence G. Grier Director of Financial Services Orange- County BACKGROUND Effective For Fiscal Year June 30, 2011 __ `~ _ ~ ~.~~ Governmental Accounting Standards Series • -~ ~~,s~ GOVERNI.tENTALA000UNTING STANDARDS BOARD M' T¢ m'.~4CU~ u:Cf+.rv~r:t'. ti'xf n~.w. n 4 OBJECTIVE ®F TODAY'S DISCUSSION __ To provide an update on GASB Statement No. 54 and the implications it will present with: • Changes in Financial Reporting • Changes in the Fiscal Year 2011-12 Budget :OVERVIEW OF GASB 54 . , _,__._ ~~~~_.mw~, Scope Changes how fund balance is presented • Clarifies use of governmental fund types ^ Used exclusively for governmental funds • • 5 • r~ u FUND ~/~LANC~ - CU~RE~VT~~iQ~IpARD What is Fund Balance? ^ Fund Balance is the difference of Assets -Liabilities. '~ Additionally, Fund Balance represents the net worth of the County at one point in time. ~~J~ND BsALANCE - CURI~ENTSTANDARD How do we currently allocate Fund Balance? Reserved - Reserve by State Statute Reserve for encumbrances Unreserved Designated -Reserved for future expenditures Undesignated -Unrestricted Fund Balance • 6 FUND RALA~GE CURRENTSTANUARD Traditional focus =Fund resources available for appropriation (budgeting) ^ Reserved Fund Balance =Not available ^ Unreserved Fund Balance =Available F1~,~1D BALANCE CURRENTSTANDARQ Reserved Fund Balance =Not available ^ Resources not available for spending in the current year's budget ry~~~rn~i ~j~j~1i? iri~~~ri~~ri~~, ~r~r.~?rr~'~r~~r~ ^ Legal restrictions impose a limitation on purpose of the fund. r~~~~r~~~l ~. ~~~~~r~fy~. ~r~l-r~ :~,r ~~~t~j`t ~~ U • 7 • FUND BALANCE -CURRENTST~I~VDARD Designated Fund Balance -intended use of resources by management or governing body. • Widespread confusion about terminology • Categories often applied inconsistently ^ Challenges to focus on availability for ~~,,._ appropriation • ~ 8 • GA$B 54 ESTABLISHES NEW FUND ,: }. BALANCE CLASSIFICATIONS Components of Fund Balance: ^ Nonspendable • Restricted ^ Committed ^ .Assigned • Unassigned NEW FUND BALANCE ~LASSIF~GY,~ ~ . , ~,3 µ w~~~~:~ Nonspendable Restricted Currently -Reserved Fund Balance Committed Assigned Currently -Designated UnasSlgned Essentially what is unreserved fund balance • ~~ ~J 9 • • NQNS~'ENDABLE FU~1D BALANCE Not in spendable form • Cannot ever be spent (e.g.; supplies inventories and prepaid) . Cannot currently be spent (e.g., the long-term portion of loans receivables Legally or contractually required to be maintained intact (e.g., principal of an sinking fund) RESTRICTED FUND BALANCE Amounts constrained to being used for a specific purpose by: ^ External parties (i.e., creditors, grantors, contributors, or laws or regulations of other governments ^ Imposed by law through constitutional ~' _' provisions or enabling legislation - RSS • ~o COMMITTED FUND BALANCE Amounts whose use is constrained by limitation that the government imposes upon itself ^ Constraint on use imposed by the government's highest level of decision making authority ^ Same type of action required to remove or change the specified use ^ Action to constrain resources should occur prior to end of fiscal year ASSIGNED FUND BALANCE Amounts intended to be used for specific purposes. Intent is expressed by The governing body itself, or an official delegated by the governing body (appropriated fund balance for next year expenditures). • 11 • COMMITTED ~S. ASSIGNED • Both constrained to being used for specific purposes by actions taken by the government itself • Assignment is not required to be made by the government's highest level of decision making authority • Same action is not required to remove or modify an assignment I~~AS~-~GN~Q FUND ~AI~~CE • Available for any purpose • General fund should be the only fund that reports a positive unassigned fund balance • Deficit balance possible in any governmental fund • 12 ENCUMBRANCES ^ Encumbrances should not be displayed as restricted, committed, or assigned categories. ^ Amounts are classified as restricted, committed, or assigned based on the source and strength of the constraints placed on them-encumbering those - amount does not further affect them. IVC~TE DISCLaSURE .,_ _.~nz Description of authority and. actions that lead to committed and assigned fund Balance for Committed Fund Balance: - The government's highest level of decision making authority and the formal action that is required to be taken. • • 13 • NOTE DISCLOSURE J For Assigned Fund Balance: The body or official authorized to assign amounts to a specific purpose. The policy established by the governing body pursuant to which that authorization is given. MUTE DISCLOSURE ,_a.~_ ^ Government policy regarding order of spending - Restricted and unrestricted fund balance - Committed, assigned, and unassigned ^ Stabilization arrangements - Authority for establishing - Requirements for additions - Conditions under which amounts may be used • 14 Governmental Fund Type Definitions GENERAL FUND Current Definition: The general fund is used to account for all financial resources except those required to be accounted for in another fund. GASB 54 Definition: The general fund is used to account for and report all financial resources not accounted for and reported in another fund. • r~ • 15 • SPECIAL REVENUE FUND Current Definition: Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes. SPECIAL REVENUE FUNDS Statement 5~ Definition: • Special Revenue Funds are used to account for and report proceeds of specific revenue sources that are . ' to expenditure for specified purposes other than debt service or capital projects. • ~ 16 • $F'ECIAL REVENUE FUNDS ^ Proceeds of specific revenue source that are restricted or committed should be recognized as revenue in the special revenue fund and not in i the fund initially receiving them. ^ If the government no longer expects that a substantial portion of the inflows will derive from restricted or committed revenue source, then the resources should be reported in the general fund. caP Current Definition: Capital Project Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities. • All Capital Reserve Funds must now be combined with the Capital Projects Fund ^ The restricted portion of the reserve will not be either restricted or committed fund balance within the fund. • • 17 C7 • CAPITAL PROJECT FUNDS _ . Statement 54 Definition: Capital Project 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. CAPITAL RESERVE FUNDS GASB Statement 54 does not prohibit the use of capital reserve funds; the General Statutes authorize the use of these funds. Statement 54 only provides guidance on how to classify and report these funds according to fund type. Under previous guidance they were reported as special revenue fund types; under new guidance they will be reported as capital projects, as part of the capital projects fund or as a debt service fund, depending on how the moneys in the capital reserve fund are used. • 18 • Orange County GASB 54 Fund Balance Changes June 30, 2010 Current Presentation balance Reserved for inventories ............................ Reserved for encumbrances ...................... Reserved by State Statute ......................... Designated for future year ezpendifures.... Undesignated ............................................. Total Fund Balance GASB 54 Presentation Fund balance Nonspendable $ 143,078 Invenfories ............................................................ $ 143,D78 1,843,044 Restricted 1,956,442 Restricted by State Siafute ................................... 9,199,486 Committed Committed for Department of Social Services...... 401,673 Assigned ................................................................... 401,673 21,097,822 Unassigned .............................................................. 21,097,622 $ 31,442,059 Total Fund Balance $ 31,442,0591 WHAT TO D®? Communicate the fund balance changes to the BOCC, Manager and others so the changes are reflected in the FY 2011-12 Budget . Establish a fund balance policy that implements GASB 54. Change the Fund Definitions and consolidate funds to comply with the new standard. • • 19 • '~ GASB 54 'FUND BALANCE REPaRTING AND _ ,, '~ GOVERNMENTi4L FUND TYPE DEFINITIQNS Clarence G. Grier Director of Financial Services Orange County • BACKGROUND i ,,,~. . ,, .._, , , x,: Effective For Fiscal Year June 30, 2011 '~ •e,~~.~.~. Governmental Accounting Standards Series • i ~_~s~ 3} GOVERNM[NTAL ACCOUNTING STANDARDS BOARO ~i?:K rnt:~N;w. #X'.d.~im'1:: i{Y3ln::~'i: 20 OBJECTIVE OF TODAY'S DISCUSSION., To provide an update on GASB Statement No. 54 and the implications it will present with: • Changes in Financial Reporting • Changes in the Fiscal Year 2011-12 Budget OVERVIEW OF GASB 54 '`Scope • Changes how fund balance is presented • Clarifies use of governmental fund types • Used exclusively for governmental funds • • • 21 • • FUND BALANCE -CURRENT STANDARD What is Fund Balance? ^ Fund Balance is the difference of Assets -Liabilities. ^ Additionally, Fund Balance represents the net worth of the County at one point in time.. FUND BALANCE CUR~tENTSTANDARD ~.3 , 2. _ -How do we currently allocate Fund Balance? Reserved - Reserve by State Statute Reserve for encumbrances Unreserved Designated -Reserved for future expenditures Undesignated -Unrestricted Fund Balance • ~ 22 FUND BALANCE CURRE~VTSTANDARD Traditional focus =Fund resources . available for appropriation (budgeting) ^ Reserved Fund Balance =Not available ^ Unreserved Fund Balance =Available Fl1ND B~4LA~CE CU~I~Et~TST~1NpARD ... :a ,T.. ,._... Reserved Fund Balance =Not available ^ Resources not available for spending in the current year's budget ~~t~~rti~l~: ~~~~ lip ir~~t~ti~ril~; ~r~t•~~rr~~~r~~r~~; ^ Legal restrictions impose a limitation on purpose of the fund. ~;<~irr~pl~: Iv~r~~r~~~r1 ~y ,-., ~rc~~~ :~r~~ri~jr • • • 23 • ~UfVD BALANCE -CURRENT STANDARD Designated Fund Balance -intended use of resources by management or governing body. Vi/HYTHE IVEEDF®R CHANGE __ _ ,_ • Widespread confusion about terminology • Categories often applied inconsistently • Challenges to focus on availability for appropriation • t - 24 • GASB 54 ESTABLISHES NEVI/ FUND BALANCE GLASSfFICATIONS Components of Fund Balance: • Nonspendable • Restricted ^ Committed • Assigned • Unassigned NEW F~JND BA~AN~~ CLASSI~lGr4T~QNS Nonspendable Restricted Currently -Reserved Fund Balance Committed Assigned Currently -Designated Unassigned Essentially what is unreserved fund balance U 25 • • NON~PENDABLE FUND BALANCE Not in spendable form . Cannot ever be spent (e.g., supplies inventories and prepaid) • Cannot currently be spent (e.g., the long-term portion of loans receivables Legally or contractually required to be maintained intact (e.g., principal of an ~-- sinking fund) RE.S~'~~CTFD ~UNQ ~~4LANC ....._ Amounts constrained to being used for a specific purpose by: ^ External parties (i.e., creditors, grantors, contributors, or laws or regulations of other governments ^ Imposed by law through constitutional provisions or enabling legislation - RSS ' ' 26 ~CallIIMITTED FUND BALANCE ~~: :.Amounts whose use is constrained by limitation that the government imposes upon itself ^ Constraint on use imposed by the government's highest level of decision making authority ^ Same type of action required to remove or change the specified use ^ Action to constrain resources should occur prior to end of fiscal year ASSIGNED FUND BALANCE Amounts intended to be used for specific purposes. Intent is expressed by The governing body itself, or an official delegated by the governing body (appropriated fund balance for next year expenditures). • • • • COMMITTED VS. ASSIGNED • • Both constrained to being used for specific purposes by actions taken by the government itself • Assignment is not required to be made by the government's highest level of decision making authority • Same action is not required to remove or modify an assignment UNASSICNE~ FUND BALANCE • Available for any purpose • General fund should be the only fund that reports a positive unassigned fund balance • Deficit balance possible in any governmental fund 27 • 28 ENCUMBRANCES ^ Encumbrances should not be displayed as restricted, committed, or assigned categories. ^ Amounts are classified as restricted, committed, or assigned based on the source and strength of the constraints placed on them-encumbering those amount does not further affect them. NOTE DISCLOSURE Description of authority and actions that lead to committed and assigned fund Balance for Committed Fund Balance: - The government's highest level of decision making authority and the formal action that is required to be taken. • • • 29 • DOTE DISCLOSURE u .,-_ ..w ~...,.r ~... . For Assigned Fund Balance: The body or official authorized to assign amounts to a specific purpose. The policy established by the governing body pursuant to which that authorization is given. ~1t3TE DISCLOSURE .a,µ ^ Government policy regarding order of spending -Restricted and unrestricted fund balance - Committed, assigned, and unassigned- ^ Stabilization arrangements -Authority for establishing - Requirements for additions - Conditions under which amounts may be used • l 30 • Governmental Fund Type Definitions GENERAL FUND ___ . ^ Current Definition: The general fund is used to account for all financial resources except those required to be accounted for in another fund. • GASB 54 Definition: The genera! fund is used to account for and report all financial resources not accounted for and reported in another fund. 31 • SPECIAL REVENUE FUND Current Definition: Special Revenue Funds are used to account for the proceeds of specific revenue sources that are legally restricted to expenditure for specified purposes. SPECIAL REVENUE FUNDS G _ __ ._ ~: . Statement 54 Definition: • Special Revenue Funds are used to account for and report proceeds of specific revenue sources that are ` to expenditure for specified purposes other than debt service or capital projects. 32 • SPECIAL REVENUE FUNDS ^ Proceeds of specific revenue source that aie "' restricted or committed should be recognized as revenue in the special revenue fund and not in the fund initially receiving them. ^ If the government no longer expects that a substantial portion of the inflows will derive from restricted or committed revenue source, then the resources should be reported in the general fund. CAPITAL RR~JECT FUNDS Current Definition: Capital Project Funds are used to account for financial resources to be used for the acquisition or construction of major capital facilities, ^ All Capital Reserve Funds must now be combined with the Capital Projects Fund. ^ The restricted portion of the reserve will not be either restricted or committed fund balance within the fund. • 33 • • CAPITAL PROJECT FUNDS Statement 54 Definition: Capital Project 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. CAPITAL RESERVE FUNDS GASB Statement 54 does not prohibit the use of .capital reserve funds; the General Statutes authorize the use of these funds. Statement 54 only provides guidance on how to classify and report these funds according to fund type. Under previous guidance they were reported as special revenue fund types; under new guidance they will be reported as capital projects, as part of the capital projects fund or as a debt service fund, depending on how the moneys in the capital reserve fund are used. • 34 •~ Orange County GASB 54 Fund Balance Changes June 30, 2010 Current Presentation balance Reserved for inventories ............................ $ 143,018 Reserved for encumbrances ...................... 1,643,044 Reserved by State Statute ......................... 7,956,442 Designated for future year ezpendilures.... 401,673 Undesignated ............................................. 21,097, 822 Fund Balance GASB 54 Presentation Fund balance Nonspendable Inventories ............................................................ S 143,078 Restricted Resfnded by State Statute ................................... 9,799,486 Committed Committed for Department of Sodal Services...... Assigned ................................................................... 401,673 Unassigned .............................................................. 21,097,622 $ 31,442,059 Total Fund Balance $ 31,442,059 WHAT TO D®? Communicate the fund balance changes to the BOCC, Manager and others so the changes are reflected in the FY 2011-12 Budget . Establish a fund balance policy that implements GASB 54. Change the Fund Definitions and consolidate funds to comply with the new standard. • • ~.4~~ 35 ORANGE COUNTY BOARD OF COMMISSIONERS • DRAFT FUND BALANCE MANAGEMENT POLICY The purpose of this policy is to establish a fund balance policy to address the needs of Orange. County (County) and establish adequate reserves to ensure against unanticipated events that will not adversely affect the financial condition of the County and not jeopardize the continuation of necessary public services. This policy will ensure the County maintains adequate fund balance and reserves in the County's Governmental Funds to provide the capacity to: 1. Provide sufficient cash flow for daily financial needs, 2. Secure and maintain investment grade bond ratings, 3. To provide adequate reserves to offset significant economic downturns or revenue shortfalls, and 4. Provide adequate reserves for unforeseen expenditures related to emergencies. Fund Balance for the County's Governmental Funds will be comprised of the following categories: 1. Nonspendable -amounts that cannot be spent because they are either (a) not in spendable form or (b) legally or contractually required to be maintained intact. 2. Restricted -amounts externally imposed by creditors (debt covenants), grantors, • contributors, laws, or regulations of other governments. 3. Committed -amounts used for a specific purpose pursuant to constraints imposed by formal action of the government's highest level of decision-making authority. a. Amounts set aside based on self-imposed limitations established and set in place prior to year-end, but can be calculated after year end. b. Limitation imposed at highest level and requires same action to remove or modify c. Ordinances that lapse at year-end 4. Assi ned -amounts that are constrained by the government's intent to be used for specific purposes, but are neither restricted nor committed. 5. Unassigned -amounts that are not reported in any other classification. The General Fund will be the only fund that will have an unassigned fund balance. The Special Revenue Funds and Capital Project funds will consist of only nonspendable, restricted, committed and assigned categories of fund balance. Unassigned Fund Ba~ance -General Fund Orange County has adopted a fiscal policy that provides for capital projects to be financed with debt and pay-as-you-go funding. In order to obtain the best possible financing, the unit has • adopted policies designed to maintain bond ratings at or better than AAA (Fitch), Aa2 (Moody's Investor Services) and AA+ (Standard & Poor's). Part of the County's fiscal health is 36 maintaining a fund balance position that is adequate to meet the County's needs and challenges. • Orange County has therefore adopted a policy that directs management to maintain an unassigned balance as follows: 1. The County will strive to maintain an unassigned fund balance in the General Fund of 17% percent of budgeted general fund operating expenditures each fiscal year. The amount of unassigned fund balance maintained during each fiscal year should not fall below 8% percent of budgeted general fund operating expenditures as recommended by the North Carolina Local Government Commission. 2. To the extent that the General Fund unassigned fund balance exceeds 17% percent the balances may be utilized to fund capital expenditures or pay down outstanding County debt. 3. The County's budget and revenue spending policy provides for programs with multiple revenue sources. The Finance Services Director will use resources in the following hierarchy: bond proceeds, Federal funds, State funds, local non-county funds, county funds. For purposes of fund balance classification, expenditures are to be spent from restricted fund balance first, followed in-order by committed fund balance, assigned fund balance, and lastly unassigned fund balance. The Finance Services Director has the authority to deviate from this policy if it is in the best interest of the County. • 4. Management is expected to manage the budget so that revenue shortfalls and expenditure increases do not impact the units total unassigned fund balance. If a catastrophic economic event occurs that requires a 10% or more deviation from total budgeted revenues or expenditures then unassigned fund balance can be reduced by action from the Board of County Commissioners; the Board also will adopt a plan on how to return spendable fund balance back to the required level. Enterprise Funds - (Solid Waste, Efland Sewer, and the Orange County Sportsplex) -The County will strive to maintain unrestricted net assets greater than 8% of total operating revenues at fiscal year-end, net of any donated assets recognized, to provide reserves for operations and future capital improvements. Restrictions, reservations, and designations of Net Assets for Enterprise Funds For external reporting purposes, net assets will be reported as restricted or unrestricted in accordance with GAAP. For internal purposes, net assets will be reserved or designated as follows: 1. Encumbered balances to continue existing projects are designated. 2. Designations for funding of planned projects in a future period to reduce the financial demands placed upon a subsequent budget. • 37 Internal Service Funds -Dental Insurance Fund -total net assets shall maintain a positive balance to illustrate the internal nature of recovery fees for services performed in self-insuring employees of the County. Additionally, the net assets of the fund will demonstrate adequate funding for incurred, but not reported claims. • •