5.7. SR 04-05-2010 - Laserfiche WebLink

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The basic financial statements should provide information on the nature and purpose of each major component of reserved fund balance and unreserved fund balance. The notes to the financial statements should disclose this information when it is not discernible on the face of the financial statements. Recommendations Adoption of Fund Balance Policy The Office of the State Auditor recommends that each local government establish a formal policy on the level of unreserved fund balance that should be maintained in the general fund and special revenue funds. The policy should be set by the governing body and should provide both a time frame and a specific plan for increasing or decreasing the level of unreserved fund balance. If the fund balance does not match the policy, a plan should be developed by the governing body that will allow for compliance with the policy. The Office of the State Auditor recommends each local government adopt a policy specifying the types of future expenditures to be designated, how the amounts for such designations are arrived at, and whether the governing body will set the designations annually or will set up a designation process and appoint someone to make the determination based on the guidelines established by the governing body. The local government's revenue streams should be kept in mind when drafting such a policy. For example, funds that rely heavily on property taxes must maintain sufficient financial resources to provide adequate resources until the next tax revenue collection cycle. Funds that rely on state appropriations and grants should consider the timing of those payments. Also, local governments need to maintain a prudent level of financial resources to protect against a forced service level reduction or having to raise taxes and fees because of temporary revenue shortfalls or unpredicted one-time expenditures. Other considerations include the predictability of revenues and the volatility of expenditures--higher levels of unreserved fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile. The availability of resources in other funds as well as the potential drain on the general fund resources from other funds could affect the level of unreserved fund balance needed. The availability of resources in other funds may reduce the amount of unreserved fund balance needed in the general fund, just as deficits in other funds may require that a higher level of unreserved fund balance be maintained in the general fund. In some cases, the unreserved fund balance in special revenue funds may not be available for use for general operations of the local government, for example a park dedication special revenue fund in a city or a ditch special revenue fund in a county. In these situations, it is important for the local government's fund balance policy to document that these type of funds are not available for future appropriation to the general operations of the local government. Reviewed: January 2008 3 Revised: NA 2007-1022