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IV-24CITY OF ELK RIVER NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2019 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) S. Compensated Absences It is the City's policy to permit employees to accumulate earned but unused vacation and sick pay benefits. Unused vacation can be accrued by the employees up to a maximum of 240 hours, the limit of which is determined by years of service. All vacation pay is accrued when incurred in the government-wide and proprietary fund financial statements. A liability for these amounts is reported in governmental funds only if they have matured, for example, as a result of employee resignations and retirements. In the event a liability is recorded in the governmental funds, the General fund would be used to liquidate the compensated absences payable. Employees can also accrue an unlimited amount of unused sick leave. Employees with two or more years of service are entitled to receive severance pay equal to 50% of unused sick leave, up to a maximum of 480 hours. The liability for severance pay is accounted for the same as accrued vacation pay. T. Postemployment Benefits The City of Elk River and its discretely presented component unit provide a single-employer defined benefit healthcare plan to eligible retirees and their spouses. The plan offers medical insurance benefits. The total OPEB liability, deferred outflows of resources and deferred inflows of resources related to OPEB and OPEB expense were measured actuarially in accordance with GASB Statement No. 75, based on entry age normal cost method. U. Fund Balance In the fund financial statements, fund balance is divided into five classifications based primarily on the extent to which the City is bound to observe constraints imposed upon the use of resources reported in governmental funds. These classifications are as follows: Nonspendable -consists of amounts that cannot be spent because it is not in spendable form, such as prepaid items. Restricted -consists of amounts related to externally imposed constraints established by creditors, granters or contributors; or constraints imposed by state statutory provisions. Committed -consists of amounts that are constrained for specific purposes that are internally imposed by formal action (resolution) of the City Council. Those committed amounts cannot be used for any other purpose unless City Council removes or changes the specified use by taking the same type of action it employed to previously commit those amounts. CITY OF ELK RIVER NOTES TO BASIC FINANCIAL STATEMENTS DECEMBER 31, 2019 NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) U. Fund Balance (Continued) Assigned-consists of amounts intended to be used by the City for specific purposes but do not meet the criteria to be classified as restricted or committed. In governmental funds other than the General fund, assigned fund balance represents the remaining amount that is not restricted or committed. In the General fund, assigned amounts represent intended uses established by the governing body itself or by an official to which the governing body delegates the authority. Pursuant to City Council Resolution, the City's Finance Director and/or City Administrator is authorized to establish assignments of fund balance. Unassigned -is the residual classification for the General fund and also reflects negative residual amounts in other funds. The City uses restricted amounts to be spent first when both restricted and unrestricted fund balance is available. Additionally, the City would first use committed, then assigned, and lastiy unassigned amounts of unrestricted fund balance when expenditures are made. The City Council has formally adopted a fund balance policy for the General fund. The City's policy is to maintain a minimum unassigned fund balance of 40-45% of budgeted operating expenditures for cash-flow timing needs. V. Net Position Net position represents the difference between assets and deferred outflows of resources and liabilities and deferred inflows of resources. Net position is displayed in three components: Net investment in capital assets -Consists of capital assets, net of accumulated depreciation reduced by any outstanding debt attributable to acquire capital assets. Restricted net position -Consists of net position balances restricted when there are limitations imposed on their use through external restrictions imposed by creditors, granters, laws or regulations of other governments. Unrestricted net position -All other net position balances that does not meet the definition of "restricted' or "net investment in capital assets". When both restricted and unrestricted resources are available for use, it is the City's policy to use restricted resources first, then unrestricted resources as they are needed. X. lnterfund Receivables and Payables Activity between funds that is representative of lending or borrowing arrangements is reported as either "due to/from other funds' (current portion) or "advances to/from other funds." Any residual balances outstanding between the governmental activities and business-type activities are reported in the government-wide financial statements as "internal balances." 172