Fund Balance Discussion; Bishop
CITY OF HOPKINS
Memorandum
To: Honorable Mayor and Council Members
Mike Mornson, City Manager
From: Nick Bishop, Finance Director
Date: June 14, 2022
Subject: Fund Balance Discussion
_____________________________________________________________________
PURPOSE
On March 15, City Council reviewed the preliminary/unaudited operating results for
2021. At that time, the City’s unassigned fund balance was projected to exceed the
amount required in the fund balance policy by approximately $1.35 million. City Council
had indicated that they would like to have additional discussions on the surplus amount
and potential uses. Staff is looking for direction from City Council regarding a fund
balance surplus.
INFORMATION
The City’s fund balance policy states: “At the end of each fiscal year, the City will strive
to maintain Spendable – Unassigned portions of the fund balance for Cash Flow
equivalent to a minimum of five (5) months or 42% of the prior fiscal year General Fund
operating expenditures.” The purpose of maintaining this level of fund balance is for
cash flow needs, emergencies or contingencies. Policy 6-G: Fund Balance is attached
for your information.
The audit is nearing completion, no changes are anticipated for the following operating
results in 2021. The City’s General Fund revenues exceeded budget by $320,578 or
2.04%. General Fund expenditures were $835,780 or 5.31%% less than budget. The
fund balance increased by $1,156,367. The main factors for the increase in fund
balance are:
• Approximately $400,000 of savings for salary and benefits due to open positions
that were not immediately filled due to hiring challenges, suspended operations
due to COVID-19 or eliminating or combining positions during 2021. Eliminated
and combined positions will result in future savings and reductions to budgeted
amounts.
Finance Department
• A reduction of the City’s paid leave accrual of approximately $400,000. This is a
result of a COVID-19 leave benefit expiring and increased use of paid time off by
employees due to eased travel restrictions from the pandemic in 2021.
• Increased revenue of approximately $300,000 due to an increased inspections
revenue compared to budget and the private activity bond fee from Trellis Co. for
the Burnes Building.
At the end of 2021, the unassigned fund balance in the general fund was $7,989,399 or
53.6% of general fund expenditures. The fund balance exceeds policy by $1,725,075.
The policy is comparing fund balance to prior year expenditures and part of the reason
for the surplus is much lower than expected expenditures. When compared to the 2022
Budget, the surplus over 42% is $1,196,479.
Each year, the City Council adopts a balanced budget in the General Fund with no
planned increase or decrease to fund balance. The City has experienced significant
increases to the fund balance in both 2020 and 2021. With a large portion of the
increases being related in some way to the COVID-19 pandemic. Some examples are
grants received, deliberate spending freezes and positions being left open, eliminated
or combined. In the five years preceding the pandemic (2015-2019) the City’s fund
balance increased by an average of $70,000 per year or less than one percent of
budgeted expenditures.
There are three main options for what to do with the surplus. A more detailed overview
will be provided during the June 14th meeting.
1. Maintain for cashflow, contingencies or emergencies. The amount will remain a
part of the City’s fund balance going forward. There is no need or requirement to
make a decision or spend down the amount.
2. Use for an already existing request. The currently adopted 2022-2026 Capital
Improvement Plan and Equipment Replacement Plan have scheduled projects or
equipment purchases in 2023. Using the fund balance for these purposes could
help to reduce the tax levy in 2023 without delaying spending.
3. Use for a new project or initiative. Potential uses are a Fire Department Staffing
Study or capital or equipment needs not currently included in the CIP or ERP.
FUTURE ACTION
None at this time. Additional discussion or approvals could be needed based on
Council’s direction.
POLICY 6-G
FUND BALANCE POLICY
1. BACKGROUND
1.01 In February 2009, the Governmental Accounting Standards Board (GASB) issued GASB
54 Fund Balance Reporting and Governmental Fund Type Definitions. The statement
substantially changes how fund balances are categorized. It clarifies/modifies how some of
the governmental funds are presented and classified.
1.02 This policy will provide a cross reference between the Pre-GASB #54 Fund Balance
Classifications and the Post-GASB #54 Fund Balance Classifications.
2. FUND BALANCE CLASSIFICATIONS: CURRENT AND GASB #54
2.01 Pre-GASB #54 Classifications of Fund Balance
2.02 Post-GASB #54 Classifications of Fund Balance
ReservedNot availableforappropriationNon-spendableNotavailableforspending, eithernoworinthefuture, becauseoftheformoftheasset (e.g., inventories) orapermanentlegalrestrictionDesignatedAvailableforappropriationbutintendedforaspecificuse. RestrictedConstraintsonspendingthatarelegallyenforceablebyoutsideparties. e.g., debtretirement) DesignatedNotavailableforappropriation. CommittedConstraintsonspendingthatthegovernmentimposesuponitselfbyhighest-levelformalactionpriortothecloseoftheperiod. UnrestrictedUndesignatedAvailable forappropriation. AssignedResourcesintendedforspendingforapurposesetbythegoverningbodyitselforbysomepersonorbodydelegatedtoexercisesuchauthorityinaccordancewithpolicyestablishedbytheboard. UnassignedResidualgeneralfundonly)
3. PURPOSE
To provide a stable financial environment for the City of Hopkins’s operations that allows
the City to provide quality services to its residents in a fiscally responsible manner designed
to keep services and taxes as consistent as possible over time. This fund balance policy is
meant to serve as the framework upon which consistent operations may be built and
sustained.
Legislative Policy Manual -- Chapter 6-G1
4. DEFINITIONS AND POLICIES
4.01 Fund Balance
Fund Balance is the difference between assets and liabilities in governmental funds (i.e.
general fund, special revenue funds, capital project funds, debt service funds and permanent
funds).
4.02 Non-spendable Fund Balance
Describes the amount of a fund balance that cannot be spent because it is either not in
spendable form or there is a legal or contractual requirement for the funds to remain intact.
Policy -
At the end of each fiscal year, the City will report the portion of the fund balance that is not
in spendable form as Non-spendable Fund Balance on the financial statements (prepaid
items, inventory, long-term receivables, etc).
4.03 Spendable Fund Balance (Overview) -
Describes the amount of fund balance that is available for appropriation based on the
constraints that control how specific amounts can be spent. Typically, a significant portion
of a government’s spendable resources can be spent only for specified purposes. The
following categories define the revenue source and the level of force of the constraint on
spending.
Categories should be supported by actual plans approved by either the governing body, an
appropriate officer, grant providers or enabling legislation.
A. Restricted Fund Balance
The restricted fund balance category includes the portion of the spendable fund balance that
reflects constraints on spending because of legal restrictions stipulated by outside parties
e.g., encumbrances for goods or services with outside parties-creditors, grantors
outstanding at the end of the year), Also, any legal restrictions based on state statutes or
grant requirements placed on the use for specific purposes.
Policy -
At the end of each fiscal year, the City will report “restricted” fund balance for amounts that
have applicable legal restrictions per GASB #54. In addition, encumbrances or funds
restricted by enabling legislation will be reported as “restricted”.
B. Committed Fund Balance
The committed fund balance classification includes the portion of the spendable fund
balance that reflects constraints that the city has imposed upon itself by a formal action of
the city council (for example, an ordinance or resolution passed by a city council). This
constraint must be imposed prior to year end but the amount can be determined at a later
date.
Policy -
Prior to the end of each fiscal year, the City Council will take action to commit resources
for specific purposes, as necessary (these are nonspendable based on revised guidance).
Legislative Policy Manual -- Chapter 6-G2
C. Assigned Fund Balance
The assigned fund balance is the portion of the spendable fund balance that reflects funds
intended to be used by the government for specific purposes assigned by more informal
operational plans. In governmental funds other than the general fund (special revenue funds,
capital project funds, debt service funds and permanent funds); assigned fund balance
represents the amount that is not restricted or limited. The authority to “assign” fund
balance is delegated to the City Finance Director.
Policy -
The assigned fund balance category will cover the portion of a fund balance that reflects the
City’s intended use of the resources of governmental funds other than the General Fund.
The action to assign a fund balance may be taken after the end of the fiscal year and cannot
be negative.
D. Unassigned
This is the residual classification for the government’s General Fund and includes all
spendable amounts not contained in the other classifications and, therefore, not subject to
any constraints. Unassigned amounts are available for any purpose. These are the current
resources available for which there are no government self-imposed limitations or set
spending plan. Although there is generally no set spending plan for the unassigned portion,
there is a need to maintain a certain funding level. Unassigned fund balance is commonly
used for emergency expenditures not previously considered. In addition, the resources
classified as unassigned can be used to cover expenditures for revenues not yet received.
Policy -
At the end of each fiscal year, the City will strive to maintain Spendable – Unassigned
portions of the fund balance for Cash Flow equivalent to a minimum of five (5) months or
42% of the prior fiscal year General Fund operating expenditures. In addition to cash flow
needs this accommodates emergency contingency concerns.
5. MONITORING AND REPORTING
5.01 The City Manager and Finance Director shall annually prepare the status of fund balances in
relation to this policy and present to the City Council in conjunction with the development
of the annual budget.
When both restricted and unrestricted resources are available for use, it is the City’s policy
to first use restricted resources, and then use unrestricted resources as they are needed.
When committed, assigned or unassigned resources are available for use, it is the City’s
policy to use resources in the following order; 1.) committed 2.) assigned and 3.)
unassigned.
A negative residual amount may not be reported for restricted, committed, or assigned fund
balances in the General fund.
Established 10/20/2009
Revised 12/20/2011
City of Hopkins
Legislative Policy Manual -- Chapter 6-G3
Fund Balance
Council Work Session
June 14, 2022
Fund Balance
City of Hopkins Policy 6-G: Fund Balance
City will strive to maintain fund balance equal to
42% of prior year expenditures
Cash Flow
Emergency or Contingency
Fund Balance
For the year ended December 31, 2021
Fund balance increased by $1,156,367
Revenues Exceeded budget by 320,578
Inspections Department
Private Activity Bond fee from Trellis Co.
Fund Balance
For the year ended December 31, 2021
Expenditures were $835,780 less than budget
$400,000 of savings from open positions that were not
immediately filled due to hiring challenges, suspended
operations or elimination/combination
o Elimination/combination results in future savings
$400,000 reduction in paid leave accrual from COVID
leave benefit expiring and increased use of paid time off
Fund Balance
For the year ended December 31, 2021
Significant fund balance increase in 2021 & 2020
Largely related to COVID-19
Not expected to continue
Fund Balance
As of December 31, 2021
Unassigned fund balance of $7,989,399
53.6% of General Fund expenditures in 2021
Fund Balance exceeds policy by $1,725,075
Excess over 2022 Budget -$1,196,479
Options for Surplus
1. Maintain for cashflow, contingencies or
emergencies
2. Use for previously scheduled or requested
projects (could reduce the tax levy)
3. Use on a new project or initiative
Options for Surplus
Maintain as Fund Balance
No requirement to make a decision or spend down
amount
Options for Surplus
Currently scheduled CIP projects in 2023:
Activity Center Roofs -$160,000
907 Mainstreet Windows & Doors -$55,000
Additional Request/Needs
Pavilion Indoor Turf Replacement -$95,000
Central Business Lighting Upgrades -$100,000
City Street Lighting Upgrades -$190,000
Options for Surplus
Currently scheduled ERP purchases in 2023
Approximately $1.06 million of requests
Revenue Sources Planned:
Equipment Charges -$710K
Tax Levy -$130K
Equipment Certificates –$220K
Options for Surplus
New Requests:
Fire Department Staffing Study -$100K
Evaluate a Full-Time Fire Department
Network Infrastructure Upgrade (Fiber)
Fire Hall -$60K
Lift Stations/Wells -$70K
Other