HomeMy WebLinkAboutFinally adopt Ordinance No. 1787, Amending Ordinance 1729, Section 3.30.040 mininum level of budgeted general fund.pdf Commission Memorandum
REPORT TO: Honorable Mayor and City Commission
FROM: Anna Rosenberry, Finance Director
Chris Kukulski, City Manager
SUBJECT: Finally adopt Ordinance 1787 - Amending Ordinance No. 1729, Section
3.30.040 Minimum Level of Budgeted General Fund Unreserved Fund Balance.
MEETING DATE: May 17, 2010
AGENDA ITEM TYPE: Action
RECOMMENDATION: Finally Adopt Ordinance 1787 - Amending Ordinance No. 1729,
Section 3.30.040 Minimum Level of Budgeted General Fund Unreserved Fund Balance.
BACKGROUND: On April 26, 2010, the Commission provisionally adopted this Ordinance,
making a small change (from 16.66% to 16 2/3%) in language and inserting codification
instructions. Below are the details that were presented for Provisional Adoption.
Due to recent changes by the Government Finance Officer Association’s established Best
Practices, our existing Budget Administration Ordinance No. 1729 is now out of compliance
with the City’s Charter.
Section 5.04 – “Budget” of the City Charter requires (emphasis added):
b. Unreserved Fund Balance. A minimum level of budgeted general fund
unreserved fund balance shall be established by ordinance and shall be in
accordance with the GFOA Government Finance Officers Association
recommended practice on appropriate levels of unreserved fund balance in the
general fund This provision does not limit appropriations in case of emergency
pursuant to state law.
The existing Budget Administration ordinance establishes this minimum (emphasis added):
3.30.040 Minimum Level of Budgeted General Fund Unreserved Fund Balance.
The City Manager will recommend and the Commission will adopt an Approved Budget
that results in a year-end General Fund Unreserved Fund Balance that of no less than
12% of estimated General Fund revenues. If the Commission desires to adopt or
amend the budget in a way that decreases the General Fund Unreserved Fund Balance
to a level below 12% of estimated General Fund Revenues, they may do so after holding
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a separate public hearing to state why it is in the best interest of the City to do so. At no
time may a budget be adopted or amended that results in a year-end General Fund
Unreserved Fund Balance of less than 5% of estimated General Fund Revenues. This
limit does not apply in case of an emergency, pursuant to state law.”
In October 2009, the Executive Board of the GFOA updated and changed their recommended
Best Practice for Appropriate Level of Unrestricted Fund Balance in the General Fund, which is
attached. It now establishes the minimum recommended level of 16 2/3% (two months of
operating revenue.)
The Best Practice now reads (emphasis added):
The adequacy of unrestricted fund balance in the general fund should be assessed based
upon a government’s own specific circumstances. Nevertheless, GFOA recommends, at
a minimum, that general-purpose governments, regardless of size, maintain
unrestricted fund balance in their general fund of no less than two months of regular
general fund operating revenues or regular general fund operating expenditures. The
choice of revenues or expenditures as a basis of comparison may be dictated by what is
more predictable in a government’s particular circumstances. Furthermore, a
government’s particular situation often may require a level of unrestricted fund balance
in the general fund significantly in excess of this recommended minimum level. In any
case, such measures should be applied within the context of long-term forecasting,
thereby avoiding the risk of placing too much emphasis upon the level of unrestricted
fund balance in the general fund at any one time.
With our existing language of no less than 12% of estimated revenues, our Ordinance is no
longer in compliance with GFOA’s recommended best practice of 16 2/3%.
In addition, GFOA’s new recommendation does not include a range for the minimum level
recommended as it did in the past. The previous recommendation was that the minimum reserve
be between 5-15% of operating revenues. This “5%”, at the bottom of the range, was used to
establish a minimum level that could not be breached without amending the ordinance. Because
this very low range is no longer a part of the Best Practice recommendation, we recommend
striking it from our Ordinance.
We recommend section 3.30.040 be amended to read:
3.30.040 Minimum Level of Budgeted General Fund Unreserved Fund Balance.
The City Manager will recommend and the Commission will adopt an Approved Budget that
results in a year-end General Fund Unreserved Fund Balance that of no less than 12% 16 2/3%
of estimated General Fund revenues. If the Commission desires to adopt or amend the budget in
a way that decreases the General Fund Unreserved Fund Balance to a level below 12% 16 2/3%
of estimated General Fund Revenues, they may do so after holding a separate public hearing to
state why it is in the best interest of the City to do so. At no time may a budget be adopted or
amended that results in a year-end General Fund Unreserved Fund Balance of less than 5% of
estimated General Fund Revenues. This limit does not apply in case of an emergency, pursuant
to state law.
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UNRESOLVED ISSUES: It remains to be seen if we will be able to develop a budget
recommendation for FY11 that will meet these higher reserve thresholds. We would
anticipate holding the “separate public hearing” component, if necessary, for the FY11
Budget.
ALTERNATIVES:
1. Phase the increased reserve requirement, within the Ordinance language itself. Find that
our existing reserve levels meet these new requirements, citing the clause regarding
adjustments to the minimums for “long-term forecasting.”
2. Establish a minimum reserve higher than GFOA’s recommended levels.
FISCAL EFFECTS: Because the required reserve balance restricts General Fund dollars from
being used to fund regular operations, this requirement has far reaching fiscal effects that will
continually have impact.
The FY10 Budget has an estimated ending General Fund unreserved fund balance of 14.4%
($3,078,000.) Increasing that amount to 16 2/3% would require an additional $479,385 be set
aside in reserve.
Attachments: Ordinance No. 1787
GFOA - Best Practice for Appropriate Level of Unrestricted Fund Balance in the General Fund
Report compiled on: May 12, 2010
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ORDINANCE NO. 1787
AN ORDINANCE OF THE CITY COMMISSION OF THE CITY OF BOZEMAN
MONTANA AMENDING ORDINANCE 1729 - PROVIDING THAT SECTION 3.30.040
MINIMUM LEVEL OF BUDGETED GENERAL FUND UNRESERVED FUND
BALANCE BE INCREASED TO 16 2/3%, AND ELIMINATING THE 5% MINIMUM
THRESHOLD.
BE IT ORDAINED By the City Commission of the City of Bozeman Montana that,
Section 1
That the Bozeman Municipal Code Chapter 3.30.040 be amended so that Chapter 3.30.040 reads:
3.30.040 Minimum Level of Budgeted General Fund Unreserved Fund Balance.
The City Manager will recommend and the Commission will adopt an Approved Budget that
results in a year-end General Fund Unreserved Fund Balance that of no less than 12% 16 2/3%
of estimated General Fund revenues. If the Commission desires to adopt or amend the budget in
a way that decreases the General Fund Unreserved Fund Balance to a level below 12% 16 2/3%
of estimated General Fund Revenues, they may do so after holding a separate public hearing to
state why it is in the best interest of the City to do so. At no time may a budget be adopted or
amended that results in a year-end General Fund Unreserved Fund Balance of less than 5% of
estimated General Fund Revenues. This limit does not apply in case of an emergency, pursuant
to state law.
Section 2
Repealer: All resolutions ordinances and sections of the Bozeman Municipal Code and
parts thereof in conflict herewith are hereby repealed.
Section 3
Savings provision: This ordinance does not affect the rights and duties that matured
penalties that were incurred or proceedings that were begun before the effective date of this
ordinance
Section 4
Severability: If any portion of this ordinance or the application thereof to any person or
circumstances is held invalid such invalidity shall not affect other provisions of this ordinance
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which may be given effect without the invalid provisions or application and the provisions of this
ordinance are declared to be to this end severable.
Section 5
Effective Date: This ordinance shall be in full force and effect thirty 30 days after final
adoption.
Section 6
Codification Instruction: The provisions of Section 1 shall be codified as appropriate in
Title 3, Chapter 3.30.040 of the Bozeman Municipal Code.
PASSED by the City Commission of the City of Bozeman Montana on first reading at a
regular session thereof held on the 26th day of April, 2010
______________________________________
JEFFREY K. KRAUSS
Mayor
ATTEST:
___________________________________________
STACY ULMEN, CMC
City Clerk
PASSED by the City Commission of the City of Bozeman Montana on second reading at
a regular session thereof held on the 17TH day of May, 2010.
______________________________________
JEFFREY K. KRAUSS
Mayor
ATTEST:
___________________________________________
STACY ULMEN, CMC
City Clerk
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APPROVED AS TO FORM:
___________________________________
GREG SULLIVAN
City Attorney
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BEST PRACTICE
Appropriate Level of Unrestricted Fund Balance in the General Fund (2002 and 2009) (BUDGET
and CAAFR)
Background. Accountants employ the term fund balance to describe the net assets of governmental funds
calculated in accordance with generally accepted accounting principles (GAAP). Budget professionals commonly
use this same term to describe the net assets of governmental funds calculated on a government’s budgetary
basis.1 In both cases, fund balance is intended to serve as a measure of the financial resources available
in a governmental fund.
Accountants distinguish up to five separate categories of fund balance, based on the extent to which the
government is bound to honor constraints on the specific purposes for which amounts can be spent: nonspendable
fund balance, restricted fund balance, committed fund balance, assigned fund balance, and unassigned fund
balance.2 The total of the last three categories, which include only resources without a constraint on spending or
for which the constraint on spending is imposed by the government itself, is termed unrestricted fund balance.
It is essential that governments maintain adequate levels of fund balance to mitigate current and future risks (e.g.,
revenue shortfalls and unanticipated expenditures) and to ensure stable tax rates. Fund balance levels are a crucial
consideration, too, in long-term financial planning.
In most cases, discussions of fund balance will properly focus on a government’s general fund. Nonetheless,
financial resources available in other funds should also be considered in assessing the adequacy of unrestricted
fund balance (i.e., the total of the amounts reported as committed, assigned, and unassigned fund balance) in the
general fund.
Credit rating agencies monitor levels of fund balance and unrestricted fund balance in a government’s general
fund to evaluate a government’s continued creditworthiness. Likewise, laws and regulations often govern
appropriate levels of fund balance and unrestricted fund balance for state and local governments.
Those interested primarily in a government’s creditworthiness or economic condition (e.g., rating agencies) are
likely to favor increased levels of fund balance. Opposing pressures often come from unions, taxpayers and
citizens’ groups, which may view high levels of fund balance as "excessive."
Recommendation. The Government Finance Officers Association (GFOA) recommends that governments
establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund.3
Such a guideline should be set by the appropriate policy body and should provide both a temporal framework and
1 For the sake of clarity, this recommended practice uses the terms GAAP fund balance and budgetary fund balance to
distinguish these two different uses of the same term. 2 These categories are set forth in Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance
Reporting and Governmental Fund Type Definitions, which must be implemented for financial statements for periods ended
June 30, 2011 and later. 3 Sometimes restricted fund balance includes resources available to finance items that typically would require the use of
unrestricted fund balance (e.g., a contingency reserve). In that case, such amounts should be included as part of unrestricted
fund balance for purposes of analysis.
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2
specific plans for increasing or decreasing the level of unrestricted fund balance, if it is inconsistent with that
policy. 4
The adequacy of unrestricted fund balance in the general fund should be assessed based upon a government’s own
specific circumstances. Nevertheless, GFOA recommends, at a minimum, that general-purpose governments,
regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular
general fund operating revenues or regular general fund operating expenditures.5 The choice of revenues or
expenditures as a basis of comparison may be dictated by what is more predictable in a government’s particular
circumstances.6 Furthermore, a government’s particular situation often may require a level of unrestricted fund
balance in the general fund significantly in excess of this recommended minimum level. In any case, such
measures should be applied within the context of long-term forecasting, thereby avoiding the risk of placing too
much emphasis upon the level of unrestricted fund balance in the general fund at any one time.
In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should
consider a variety of factors, including:
• The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unrestricted
fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if
operating expenditures are highly volatile);
• Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state
budget cuts);
• The potential drain upon general fund resources from other funds as well as the availability of resources
in other funds (i.e., deficits in other funds may require that a higher level of unrestricted fund balance be
maintained in the general fund, just as, the availability of resources in other funds may reduce the amount
of unrestricted fund balance needed in the general fund);7
• Liquidity (i.e., a disparity between when financial resources actually become available to make payments
and the average maturity of related liabilities may require that a higher level of resources be maintained);
and
• Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund
balance to compensate for any portion of unrestricted fund balance already committed or assigned by the
government for a specific purpose).
Furthermore, governments may deem it appropriate to exclude from consideration resources that have been
committed or assigned to some other purpose and focus on unassigned fund balance rather than on unrestricted
fund balance.
Naturally, any policy addressing desirable levels of unrestricted fund balance in the general fund should be in
conformity with all applicable legal and regulatory constraints. In this case in particular, it is essential that
differences between GAAP fund balance and budgetary fund balance be fully appreciated by all interested parties.
Approved by the GFOA’s Executive Board, October, 2009.
4 See Recommended Practice 4.1 of the National Advisory Council on State and Local Budgeting governments on the need to
"maintain a prudent level of financial resources to protect against reducing service levels or raising taxes and fees because of
temporary revenue shortfalls or unpredicted one-time expenditures" (Recommended Practice 4.1). 5 In practice, a level of unrestricted fund balance significantly lower than the recommended minimum may be appropriate for
states and America’s largest governments (e.g., cities, counties, and school districts) because they often are in a better
position to predict contingencies (for the same reason that an insurance company can more readily predict the number of
accidents for a pool of 500,000 drivers than for a pool of fifty), and because their revenues and expenditures often are more
diversified and thus potentially less subject to volatility. 6 In either case, unusual items that would distort trends (e.g., one-time revenues and expenditures) should be excluded,
whereas recurring transfers should be included. Once the decision has been made to compare unrestricted fund balance to
either revenues or expenditures, that decision should be followed consistently from period to period. 7 However, except as discussed in footnote 4, not to a level below the recommended minimum.
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