Using Unassigned Funds to Balance the Budget: In Its Most Recent State of Local Government Fiscal Conditions Research Survey, the Institute for Public Service Looked More Closely at How Fund Balances Are Used in Addressing Budget Issues

By Tomes, William E.; Berger, Anna B. et al. | Government Finance Review, December 2011 | Go to article overview

Using Unassigned Funds to Balance the Budget: In Its Most Recent State of Local Government Fiscal Conditions Research Survey, the Institute for Public Service Looked More Closely at How Fund Balances Are Used in Addressing Budget Issues


Tomes, William E., Berger, Anna B., Bassett, Megan E., Government Finance Review


During the recession and its aftermath, many families struggling to make ends meet have had to use their savings to pay bills or buy groceries. Many local governments across the nation have had to do the same, using a part of their unrestricted fund balances to cover expenses because of declining revenues and increased costs. In 2009, the Institute for Public Service and Policy Research at the University of South Carolina began a longitudinal study of the impact the recession has had on local governments in South Carolina. In its 2010-2011 State of Local Government Fiscal Conditions research survey, the institute expanded the section on use of fund balances in addressing budget issues. The results from the fund balance survey questions are presented in this article.

Government financial reports use the term fund balance to describe the difference between financial assets and liabilities. The 2009-2010 institute survey used the term "undesignated, unreserved" fund balance in reference to money available in the general fund for any purpose, that was not restricted, committed, or assigned for any other use. The Governmental Accounting Standards Board found that governments interpreted fund balance categories in different ways and fund balance reporting was inconsistent. (1) This led to the issuance of GASB Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, which addresses these inconsistencies. Governments were required to implement the new standards for the fiscal year beginning after June 15, 2010. Because some of the local governments participating in the institute's survey may not have implemented GASB Statement No. 54 when they completed the survey, the "undesignated, unreserved" terminology was still used in the 2010-2011 survey. The intention was to have participants report the "unassigned fund balance" (funds that are available for any purpose and reported only in the general fund) as currently defined by GASB 54.

When asked why they elected to use the fund balance, respondents said they did so to cover budget shortfalls (30 percent), capital projects (14 percent), grant matches (3 percent) and cost of living adjustments and bonuses (2 percent). Some listed multiple reasons, and some (3 percent) chose "other" --these responses included loss of state aid, refund of fire service fee, and using the fund balance instead of issuing bonds or tax anticipation notes. The average amount of the unassigned fund balance used was 11.58 percent, but the amount used ranged from .95 percent to 45.88 percent.

FUND BALANCE POLICIES

While some may view the fund balance as unnecessary and something that should be used to reduce taxes, financial management experts agree that some level of fund balance is needed. The Government Finance Officers Association recommends that governments establish a fund balance policy and maintain a fund balance of no less than two months (16.67 percent) of general fund operating expenditures. (2) The GFOA also notes that higher minimum balances should be considered in cases of rapidly growing budgets, disparities in timing between revenue and expenditures, and the possibility of natural disasters such as hurricanes. (3) The International City/County Management Association uses bond rating firms' rule-of-thumb figure of maintaining at least 5 percent of annual operating expenditures as an acceptable fund balance. (4)

Forty-nine local governments responded to the question about whether their jurisdiction had a fund balance policy. Twenty-nine (59%) indicated that they did, and 16 of those had policies that required replenishment of the funds if the balance dropped below a certain level. Seven jurisdictions reported that their fund balances were lower than the amount required by their policy. Exhibit 1 summarizes responses regarding fund balance policies.

WHAT THE NUMBERS MEAN

Does using part of its fund balance indicate that a city or county is struggling financially? …

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