The Board of Trustees (the "Village Board") of the Village of Bannockburn
(the "Village") believes that sound financial management requires
sufficient funds be maintained by the Village for unanticipated expenditures
and revenue shortfalls during the course of the fiscal year. Generally,
fund balances should be maintained at levels that provide adequate
cushioning in the event of economic downturns, emergencies or unanticipated
revenue shortfalls. Low fund balances will permanently reduce investment
income and have a negative impact on the Village's credit rating.
Excessive fund balances may reflect stockpiling by management or a
lack of financial planning.
The fund balance policy is created to enhance the usefulness of fund
balance information by providing clearer fund balance classification
that can be more consistently applied and by clarifying the existing
governmental fund type definitions. The Village has created this fund
balance policy to provide a reserve for the following funds: General
Fund, Water Fund and Sewer Fund. The fund balance policy follows generally
accepted accounting principles (GAAP) and has been developed to:
The fund balance policy is intended to provide guidelines during
the preparation and execution of the annual budget to ensure that
sufficient reserves are maintained for unanticipated expenditures
or revenue shortfalls. It also is intended to preserve flexibility
throughout the fiscal year to make adjustments in funding for programs
approved in connection with the annual budget.
The fund balance policy should be established based upon a long-term
perspective recognizing that stated thresholds are considered minimum
balances. The main objective of establishing and maintaining a fund
balance policy is for the Village to be in a strong fiscal position
that will allow for better position to weather negative economic trends.
The fund balance is the difference between assets and liabilities
reported in a governmental fund. Fund balance measures the net current
financial resources available to finance expenditures of future periods.
A sufficient fund balance allows the Village to meet its contractual
obligations, mitigate negative revenue implications of federal or
state budget actions, mitigate the effects of economic downturns,
fund disaster or emergency costs, provide funds for cash flow timing
discrepancies and fund nonrecurring expenses identified as necessary
by the Village Board of Trustees.
The Governmental Accounting Standards Board (GASB) issued Statement
Number 54, "Fund Balance Reporting and Governmental Fund Type Definitions,"
effective for periods after June 15, 2010. The objective of this statement
was to enhance the usefulness of fund balance information by providing
clearer fund balance classification that can be more consistently
applied and by clarifying the existing governmental fund type definitions.
This statement establishes limitations on the purpose for which the
fund balance can be used. Fund balance reporting will be in accordance
with the authoritative pronouncements and may include the following
categories:
Nonspendable fund balance. The portion of a governmental fund's
net assets that are not available to be spent, either short term or
long term, in either form or through legal restrictions. An example
of these funds include assets that cannot be spent due to their form
(inventory, prepaid items, and long-term receivables) or funds that
legally or contractually must be maintained intact (endowment principal).
Restricted fund balance. A restricted fund balance consists
of funds that are mandated for a specific purpose by external parties,
constitutional provisions or enabling legislation. Special revenue
funds are by definition restricted or committed for those specified
purposes. Additionally, this would include, but not be limited to,
bond capital project funds and debt service funds. These limitations
are typically imposed by parties altogether outside of the Village,
such as creditors, grantors, or contributors or through laws and regulations.
Limitations can also be imposed when revenue is being raised for a
particular purpose (i.e., a gas tax imposed for road repair and construction)
pursuant to enabling legislation.
Committed fund balance. The committed fund balance consists
of funds that are set aside for a specific purpose by the Village
Board as the Village's ultimate decisionmaking authority. The Village
Board commits fund balances by passing an ordinance or resolution.
The same formal action must be taken to remove or change the limitations
placed on the funds. Committed fund balances are often used with "stabilization
funds" or "rainy-day funds." In addition, the limitations imposed
by the Village Board can only be removed by the Village Board.
Assigned fund balance. Assigned fund balances are used to describe
the portion of the fund balance that is intended for a particular
use. Assigned fund balances can be imposed by the Village Board, a
finance committee or an official designated for that purpose. As a
practical matter, existing resources that are expected to be used
in connection with open contracts and purchase orders would be classified
in this category. Assigned fund balances may be used to offset a gap
in the budget stemming from a decline in revenue. Assigned funds cannot
cause a deficit in the unassigned fund balance.
Unassigned fund balance. The final component of a fund balance
is its unassigned fund balance. This is the net balance after consideration
of the other four above-referenced categories. All funds in this category
are considered spendable resources. This category also provides the
resources necessary to meet unexpected expenditures and revenue shortfalls.
The last three categories (committed, assigned and unassigned), noted
above, together comprise the unrestricted fund balance. The unrestricted
fund balance is typically the Village's "reserves."
Responsibility. It is the responsibility of the Assistant Finance
Director to report all nonspendable and restricted funds appropriately
on the Village's financial statements.
Classifying fund balance amounts. 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, unless the Village Board has provided otherwise in its commitment
or assignment actions.
Authority to commit funds. The Village Board has the authority to
set aside funds for a specific purpose. Any funds set aside as committed
fund balance require the passage of an ordinance or resolution. The
passage of an ordinance or resolution must take place prior to April
30, of the applicable fiscal year. If the actual amount of the commitment
is not available by April 30, the ordinance or resolution must state
the process or formula necessary to calculate the actual amount as
soon as information is available.
Upon passage of the fund balance policy, direction is given
to the Village's Manager or Assistant Finance Director to assign funds
for specific purposes. Any funds set aside as assigned fund balance
must be reported to the Village Board at its next regular meeting.
The governing board has the authority to remove or change the assignment
of the funds with a simple majority vote.
The Village Board has the authority to set aside funds for the
intended use of a specific purpose. Any funds set aside as assigned
fund balance require a simple majority vote and must be recorded in
the minutes. The same action is required to change or remove the assignment.
Unassigned fund balance is the residual amount of fund balance
in the General Fund. It represents the resources available for future
spending. An appropriate level of unassigned fund balance should be
maintained in the General Fund in order to cover unexpected expenditures
and revenue shortfalls.
Unassigned fund balance may be accessed in the event of unexpected
expenditures up to the minimum established level upon approval of
a budget revision by the Village Board.
In the event of projected revenue shortfalls, it is the responsibility
of the Assistant Finance Director to report the projections to the
Village Board on a quarterly basis and shall be recorded in the minutes.
Any budget revision that will result in the unassigned fund
balance dropping below the minimum level will require the approval
of two-thirds vote of the Village Board.
Emergency reserve. Maintaining an emergency reserve is a necessity
for sound financial management and fiscal accountability. The Village
Board has the authority to establish an emergency reserve that will
be a committed fund balance. An emergency reserve is established for
the purpose of providing funds for an urgent event that affects the
health and safety residents (e.g., floods, fires, storm damage, etc.).
The minimum level for the emergency reserve is 25% of the General
Fund operating budget, which includes the annual debt service and
excludes capital expenditures. The recognition of an urgent event
must be established by the Village Board or its designee (e.g., Village
Manager). If established by the governing board's designee, the specific
urgent event must be reported to the Village Board at its next meeting.
A budget revision must be approved by the Village Board. In the event
that the balance drops below the established minimum level, the Village
Board will develop a plan to replenish the emergency reserve balance
to the established minimum level within two years.
The Village will maintain an additional General Fund "operating
reserve" with an upper goal of an additional 75% of the annual General
Fund operating budget, which includes the annual debt service and
excludes capital expenditures. This amount approximates nine months
of working capital. The operating reserve is intended to be a reserve
for unexpected events whose impact exceeds $500,000, such as failure
of the state to remit revenues to the Village, unexpected mandates,
unexpected loss of state shared revenues, continuance of critical
Village services due to unanticipated events, or to offset the unexpected
loss of a significant funding source for the remainder of the fiscal
year.
Any use of the operating reserve funds must be approved by the
Village Board and include a repayment plan that projects to restore
the operating reserve to the seventy-five-percent level within two
fiscal years following the fiscal year in which the event occurred.
Enterprise water operating reserve. The Village of Bannockburn's
enterprise operating reserve working capital will be maintained to
provide the Village with a comfortable margin of safety to address
emergencies and unexpected declines in revenue without borrowing.
The cash reserve balance (working capital) goal for the water enterprise
operating funds will be at least 75% of the actual operating expenditures
for the fiscal year.
Enterprise water debt stabilization reserve. The Village will maintain
a "debt stabilization reserve" with an upper goal of approximately
100% of the maximum annual average debt service payment, principal
and interest, for the current year. The debt stabilization reserve
is intended to provide additional security to ensure the Village's
ability to meet debt service obligations. In the event the debt stabilization
reserve is used, the Village shall strive to restore the fund to the
defined level within the next three fiscal years following the fiscal
year in which the fund was used.
Water asset maintenance reserve. The Village will maintain an additional
"asset maintenance reserve" with an upper goal equal to 2.5% of the
enterprise fund infrastructure assets. The asset maintenance reserve
may be used to provide funding for the repair and maintenance of critical
infrastructure. In the event the asset maintenance reserve is used,
the Village shall strive to restore the fund to the defined level
within the next three fiscal years following the fiscal year in which
the fund was used.
Sewer fund reserve. The Village's goal for the Sewer Fund is to remain
self-sufficient. A reserve cash balance policy is recommended to ensure
positive cash flow for operations. The minimum goal is to maintain
a positive fund reserve balance and work towards 30 days of operating
expenditures, excluding capital and debt service.