DIAA: Fund Balances

Last Revised Date: 05/21/2018 (GASB54)

This policy establishes guidelines to be used during the preparation and execution of the annual budget to ensure that sufficient reserves are maintained for unanticipated expenditures or revenue shortfalls. The policy is based upon a long-term perspective with a commitment to keeping the School of the Osage (“District”) in a strong fiscal position that will allow it to better weather negative economic trends.

Background

Statement No. 54 of the Governmental Accounting Standards Board (GASB 54) establishes accounting and financial reporting standards for all governments that report governmental funds. It establishes criteria for classifying fund balances and clarifies definitions for governmental fund types. Certain elements critical to such classification should be established by Board policy.

GASB 54 establishes five fund balance categories: Nonspendable, Restricted, Committed, Assigned, and Unassigned.

1. Nonspendable Fund Balance – Consists of funds that cannot be spent due to their form (e.g., inventories and prepaids) or funds that legally or contractually must be maintained intact.

2. Restricted Fund Balance – Consists of funds that are mandated for a specific purpose by external parties, constitutional provisions or enabling legislation.

3. Committed Fund Balance – Consists of funds that are set aside for a specific purpose by the District's highest level of decision making authority. Formal action must be taken prior to the end of the fiscal year. The same formal action must be taken to remove or change the limitations placed on the funds.

4. Assigned Fund Balance – Consists of funds that are set aside with the intent to be used for a specific purpose by the District's highest level of decision making authority or a body or official that has been given the authority to assign funds. Assigned funds cannot cause a deficit in unassigned fund balance.

5. Unassigned Fund Balance – Consists of excess funds that have not been classified in the previous four categories. All funds in this category are considered spendable resources. This category also provides the resources necessary to meet unexpected expenditures and revenue shortfalls.

Actions Leading to Restricted, Committed, and Assigned Fund Balances

For committed fund balances (as defined in GASB 54), the District's highest level of decision making authority is the Board of Education. Restrictions are authorized by the Board based on fund placement in the original adopted and later revised budget, as well as by Board resolution. Upon adoption of a budget where fund balance is used as a source to balance the budget, the Chief Financial Officer (CFO) shall record the amount as Assigned Fund Balance. Further, the Board delegates the authority to assign amounts for specific purpose(s) to either the Finance Committee or the CFO.

Order of Spending

For all funds except the Debt Service Fund, when both restricted and unrestricted funds are available for expenditure, restricted funds should be spent first unless legal requirements disallow it. When committed, assigned and unassigned funds are available for expenditure, committed funds should be spent first, assigned funds second, and unassigned funds last.

For the Debt Service Fund, the Board considers unrestricted (assigned) balances to be spent prior to restricted balances.

It is expected that spending will be classified by identification of remaining fund balances, rather than classifying expenditures during the year.

Governmental Fund Types

It is the District's expectation that substantial sources of revenue for the Teachers Fund will always be transfers from the general fund and the portion of state basic formula and Proposition C sales tax required by law. In addition, state rules for public school finance require that this fund be used to account for revenue sources legally restricted to expenditures for the purpose of teachers' salaries and benefits and tuition payments to other school districts. The Board elects to treat the Teachers Fund as a special revenue fund, and a major fund, in the financial statements.

Minimum Unrestricted Fund Balance

The Board recognizes that the maintenance of a fund balance is essential to provide for unforeseen expenses or emergencies and to provide working capital in the first several months of the fiscal year, until sufficient revenues are available to fund operations. By maintaining an appropriate fund balance, the District can avoid excessive short term borrowing and the concomitant interest expense, accumulate sufficient assets to make designated purchases or cover unforeseen expenditure needs, and demonstrate financial stability necessary to preserve or enhance its bond rating, thereby lowering debt issuance costs.

The operating fund balance is the combined fund balances for the General, Teachers, and Regular (i.e., not Bond) Capital Projects Funds. The appropriate amount for the operating reserve fund should be reviewed periodically.

Because of the cyclical nature of district revenues and expenses, one purpose of the operating reserve is to cover cash flow needs for normal district operations during each fiscal year and avoid Tax Anticipation Note borrowing; e.g., expenditures exceed revenues each year until the first property tax receipts are received in mid-December.

A component of the reserve is used to minimize the disruptive impact of major adverse financial changes on district programs and budget. Such adverse financial changes might be related to emergency facility repairs, student enrollment changes, reductions in state or local funding, etc. The funding goal for this component of the reserve may increase based on the potential needs of the district, the condition of facilities, economic prospects, and/or other pertinent factors.

Prior state law had a provision that if a district's fund balances were 17 percent or less or less than half of local property tax revenue of the prior year, then the district would not be subject to certain salary compliance rules. Although this law no longer exists, it is an indication of the legislature's opinion about a level of reserves that is not excessive.

The undesignated operating fund balance on June 30 should not be less than 30 percent of the expenditures for these funds for the prior fiscal year. The desirable level for undesignated operating fund balances at fiscal year end is a range of 30 to 40 percent of annual operating expenditures for the most recent year.

If undesignated operating fund balances decline below the 30 percent floor, the administration should take action to recommend to the Board either or a combination of a levy election and/or significant budget reduction measures.