Town of Cumberland, RI Generally

[Ord. No. 04-27A, §§ 1 — 4, 10-20-2004; Ord. No. 06-15A, § 1, 7-19-2006; Ord. No. 09-22A, § 1, 6-17-2009; Ord. No. 09-30, § 1, 11-4-2009; amended 6-19-2019 by Ord. No. 19-21]

In accordance with sound financial planning principles and recommended practices of the Government Finance Officers Association (GFOA), the Town of Cumberland should adopt a policy regarding adequate levels of fund balance and reserves. It is essential for Cumberland to maintain sufficient levels of fund balance and reserves to mitigate current and future risks such as revenue shortfalls, natural disasters, and unanticipated expenditures, and to ensure stable tax rates. It is also critical to securing and maintaining an investment grade bond rating. This policy has been developed to comply with Governmental Accounting Standards Board (GASB) Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, and establishes a range for the level of fund balance necessary in the general fund. This statement provides more clearly defined fund balance categories to make the nature and extent of the constraints placed on a government's fund balance more transparent. The statement establishes fund balance classifications that comprise a hierarchy based primarily on the extent to which government is bound to observe constraints imposed upon the use of the resources reported in governmental funds.

(1)

Purpose.

The Town hereby establishes and will maintain fund balance, as defined herein in accordance with Governmental Accounting and Financial Standards Board Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions. Fund balance shall be composed of nonspendable, restricted, committed, assigned and unassigned amounts. The general fund will be the only fund that maintains an unassigned fund balance.

A fund balance policy is adopted in order to secure and maintain investment grade ratings, meet cash flow needs, and reduce susceptibility to emergency or unanticipated expenditures and/or revenue shortfalls.

(2)

Definitions.

Governmental funds. There are five different types of governmental funds: general fund, special revenue funds, debt service funds, capital project funds, and permanent funds.

General fund: used to account for all financial resources except those required to be accounted for in another fund or reserve.

Special revenue fund: used to account for and report the proceeds of specific revenue sources that are restricted or committed to expenditure for specific purposes other than capital projects and debt service.

Capital projects fund: used to account for and report financial resources that are restricted, committed or assigned to expenditures for capital outlays, including the acquisition or construction of capital facilities and other capital assets.

Debt service fund: used to account for and report financial resources that are restricted, committed or assigned to expenditures for principal and interest payments on long-term bond issues.

Permanent fund: used to account for and report resources that are restricted to the extent only the earnings, and not principal, may be used for purposes that support the reporting of the government's programs.

(3)

Fund balance policy. As required by GASB Statement No. 54, there are five new classifications of fund balance. The hierarchy of the new fund balance classifications is outlined below:

Nonspendable fund balance. Nonspendable fund balance is established to report amounts that are not expected to be converted to cash, such as inventories and prepaid items; items not currently in cash form, such as long-term amount of loans and notes receivables, as well as property held for resale; and/or items legally or contractually required to be maintained intact, such as the corpus or principal of a permanent fund. An example of a nonspendable fund balance would be the amount of an endowment held in a trust fund.

Restricted fund balance. Amounts that can be spent only for specific purposes stipulated by external resource providers such as creditors (by debt covenants), granters, contributors or laws or regulations of other governments, or imposed by law through constitutional or enabling legislation, will be reported in special revenue funds and capital project funds.

Committed fund balance.

Commitment of fund balance may be made for such purposes including, but not limited to, a) major maintenance or improvement; b) meeting future obligations resulting from a natural disaster; and/or c) establishing reserves for specific projects.

Commitment of fund balance may be made from time to time by resolution of the Town Council. It would require the same type of formal action by the Town Council to remove or change the constraints placed on the resources. Action to commit resources must occur prior to fiscal year-end; however, the amount can be determined in the subsequent period.

Assigned fund balance. Assignment of fund balance may be based on a Town Council resolution delegating the responsibility to the Finance Director; and/or used to reflect the appropriation of a portion of existing unassigned fund balance to eliminate the difference in the subsequent year's budget in an amount no greater than the projected difference of budgeted expenditures over budgeted revenues. For all governmental funds other than the general fund, this amount is any remaining positive amounts not classified as nonspendable, restricted or committed. Amounts reported as assigned fund balance cannot result in a deficit in unassigned fund balance.

Unassigned fund balance. Unassigned fund balance is the residual classification for the general fund. This classification represents fund balance that has not been assigned to other funds and that has not been restricted, committed or assigned to specific purposes within the general fund. The unassigned fund balance may also include negative balances for any governmental funds if expenditures exceed amounts restricted, committed or assigned (a residual deficit) for specific purposes. The general fund is the only fund that can report a positive amount in unassigned fund balance. For all governmental funds other than the general fund, the amount expended in excess of resources that are nonspendable, restricted, committed or assigned which creates a residual deficit will report the negative balance in the unassigned fund balance account. In determining a residual deficit, no amount should be reported as assigned fund balance prior to reporting the deficit.

(4)

General fund balance range.

Based on best practices adopted by the Governmental Finance Officers Association (GFOA), the GFOA recommends, at minimum, that general-purpose governments, regardless of size, maintain fund balance of no less than two months of regular general fund operating revenues or general fund operating expenditures. Using the GFOA guidelines as a target, the Town will maintain an unassigned fund balance in the range of 8% to 15% of the general fund budget. For this purpose, the general fund budget shall include the municipal and school budgets.

If, after the annual audit, the unassigned fund balance falls below 8% of the general fund budget, the Finance Director will so advise the Town Council that there is a priority to restore the unassigned fund balance to an amount equal to or greater than 8% of the general fund budget. The Town shall take action as necessary to restore the unassigned fund balance to acceptable levels within three years based on a plan prepared and submitted by the Finance Director to the Town Council.

If, after the annual audit, the unassigned fund balance is greater than 15% of the general fund budget, the excess may be used in one or a combination of the following ways:

Left in the general fund to earn interest and roll forward into the subsequent year's unassigned fund balance;

Appropriated by resolution of Town Council for a one-time expenditure opportunity that does not increase recurring operating costs;

Committed to establish or increase a reserve (including but not limited to contingency reserves), or a transfer to a reserve fund as authorized by the Town Council.

(5)

Spending order of fund balances. The Town uses restricted amounts to be spent first when both restricted and unrestricted fund balances are available unless there are legal documents/contracts that prohibit doing this, such as in grant agreements which may have matching requirements. Additionally, the Town would first use committed fund balance, followed by assigned fund balance, and then unassigned fund balance when expenditures are incurred for purposes for which amounts in any of the unrestricted fund balance classifications could be used.

(6)

Annual review. Compliance with the provisions of this policy shall be reviewed as part of the annual audit process, and the amounts of restricted, committed, assigned and the minimum and maximum amount of the unassigned fund balance shall be determined during the process.