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HomeMy WebLinkAbout8.2 Motion to Approve Revisions to the Fund Balance Policy.Mr�GauC �'d'+rt;�iect Item Cover Page Subject Motion to Approve Revisions to the Fund Balance ■ • Meeting May 16, 2023 - REGULAR MEETING OF THE MOUNT PROSPECT VILLAGE BOARD - Fiscal Impact Dollar Amount Budget Source Category NEW BUSINESS Type Action Item Information Introduction In the context of financial reporting, the term fund balance is used to describe the net position of governmental funds calculated in accordance with generally accepted accounting principles (GAAP). In simple terms, what a business reports under the equity section is called "Fund Balance" under Governmental Accounting. There are three fund balance categories: • Nonspendable Fund Balance • Restricted Fund Balance • Unrestricted Fund Balance Fund balance categories are based on the constraints that control how the funds can be spent, with nonspendable having the most constraints and unrestricted having the least. An unrestricted fund balance consists of the three categories: a. Committed Fund Balance: The portion of a Governmental Fund's fund balance with self-imposed constraints or limitations that have been placed at the highest level of decision making through formal Board action. The same action is required to remove the commitment of fund balance. b. Assigned Fund Balance: The portion of a Governmental Fund's fund balance to denote an intended use of resources but with no formal Board action. 1 c. Unassigned Fund Balance: Available expendable financial resources in a governmental fund that are not the object of tentative management plans. Current Village Policy The Village's current Fund Balance Policy was updated in 2015 and calls for fund balance to be maintained between 20 and 30 percent, with a target fund balance of 25 percent of the next year's annual budgeted expenditures. Maximum Fund Balance is capped at 50 percent. The purpose of a Fund Balance Policy is to: • Ensure the continuity of operations, • Define minimum, maximum and target fund balances for the entity, • Define action items in case the fund balance fall below minimum required fund balance, • Outline uses of excess fund balance when it reaches certain level, and • Establish creditworthiness with credit rating agencies, including S&P, Moody's and Fitch (Higher the fund balance policy requirement, higher the creditworthiness, which results in a lower interest rate). The Village's current Fund Balance Policy focuses on the accounting fund balance, while it ignores unencumbered cash balance on hand. The General Fund is the most utilized operating fund and serves as an unofficial emergency fund. The 25% fund balance is good for operating purposes, but does not satisfy needs for short- term and long-term contingency planning. The Village has seen tough times in 2008 and the Village was forced to face certain tough financial decisions. Recently, the Village was able to navigate financial challenges of the COVID-19 outbreak without losing any major revenue sources. The Village needs to further strengthen its fiscal position and should have long-term contingency reserves for possible economic downturn, legislative impacts and/or for other items. Proposed Fund Balance PolicyChanges Fund Balance should range from 30% to 50% of the annual budgeted expenditures, target fund balance should be around 40%. • When the Fund balance increases beyond 60%, the surplus should be used to • Abate Pension and Debt Levy • Fund Capital Projects • Adjust Economic Emergency Fund to keep up with 2 months worth of operating cash in the Fund. • When the Fund balance drops below 30%, staff should report if the decrease is a temporary decrease or permanent. In case of a permanent decrease, staff will be required to report to the Finance Commission and the Village Board if the contingency planning should be deployed and/or use of Economic Emergency Fund should be triggered. 2 The above item was shared with the Finance Commission during the Finance Commission's regular meeting of March 23, 2023. The Finance Commission voted to support of the Fund Balance Policy revisions. This item was also presented at 2023 First Quarter Budget Review on April 25, 2023 with the Village Board and the Finance Commission. The Village Board indicated they are supportive of the Fund Balance Policy revisions. This action item formally revises the Village's Fund Balance Policy. Alternatives 1. The Village Board to adopt the attached revisions to the Fund Balance Policy revising the unrestricted fund balance for the Village to a range between 30% to 50%. 2. Action at the discretion of the Village Board. Staff Recommendation Staff recommends the Village Board adopt the attached revisions to the Fund Balance Policy, revising the unrestricted fund balance for the Village to a range between 30% to 50%. ATTACHMENTS: 2023 Budget - Fund Balance Policy -Redline.pdf 2023 Budget - Fund Balance Policy - Final.pdf 3 Attachment III VILLAGE OF MOUNT PROSPECT, ILLINOIS FUND BALANCE/NET ASSETS POLICY Purpose A Fund Balance/Net Assets Policy establishes a minimum level at which the projected end -of -year fund balance/net assets must observe, as a result of the constraints imposed upon the resources reported by the governmental and proprietary funds. This policy is established to provide financial stability, cash flow for operations, and the assurance that the Village of Mount Prospect will be able to respond to emergencies with fiscal strength. More detailed fund balance financial reporting and the increased disclosures will aid the user of the financial statements in understanding the availability of resources. It is the Village's philosophy to support long-term financial strategies, where fiscal sustainability is its first priority, while also building funds for future growth. It is essential to maintain adequate levels of fund balance/net assets to mitigate current and future risks and to ensure tax rates. Fund balance/net asset levels are also crucial in long-term financial planning. Credit rating agencies carefully monitor levels of fund balance/net assets and unassigned fund balance in the General Fund to evaluate the Government's continued creditworthiness. Definitions Governmental Funds The fund balance will be composed of three primary categories: 1) Nonspendable Fund Balance — portion of a Governmental Fund's fund balance that is not available to be spent, either in the short-term or long-term, or through legal restrictions (e.g., inventories, prepaid items, land held for resale and endowments). 2) Restricted Fund Balance — portion of a Governmental Fund's fund balance that is subject to external enforceable legal restrictions (e.g., grantor, contributor and property tax levies). 3) Unrestricted Fund Balance — is made up of three components: a. Committed Fund Balance —the portion of a Governmental Fund's fund balance with self-imposed constraints or limitations that have been placed at the highest level of decision making through formal Board action. The same action is required to remove the commitment of fund balance. b. Assigned Fund Balance — the portion of a Governmental Fund's fund balance to denote an intended use of resources but with no formal Board action. c. Unassigned Fund Balance — available expendable financial resources in a governmental fund that are not the object of tentative management plans. Some funds are funded by a variety of resources, including both restricted and unrestricted (committed, assigned and unassigned). The Government assumes that the order of spending fund balance is as follows: restricted, committed, assigned, unassigned. 1 4 Proprietary Funds Proprietary funds include enterprise and internal service funds. The net assets will be composed of three primary categories: 1) Invested in Capital Assets, Net of Related Debt — portion of a proprietary fund's net assets that reflects the fund's net investment in capital assets less any amount of outstanding debt related to the purchase/acquisition of said capital assets. Related debt, for this purpose, includes the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of capital assets of the Government. 2) Restricted Net Assets — portion of a proprietary fund's net assets that are subject to external enforceable legal restrictions (e.g., grantor, contributor and bond covenants). 3) Unrestricted Net Assets — portion of a proprietary fund's net assets that is neither restricted nor invested in capital assets (net of related debt). Authority Governmental Funds Committed Fund Balance — A self-imposed constraint on spending the fund balance that must be approved by ordinance or resolution of the Board. Any modifications or removal of the self-imposed constraint must use the same action used to commit the fund balance. Formal action to commit fund balance must occur before the end of the fiscal year. The dollar amount of the commitment can be determined after year end. Assigned Fund Balance —A self-imposed constraint on spending the fund balance based on the Government's intent to use the fund balance for a specific purpose. The authority may be delegated to members of the management team by the Board. Minimum Unrestricted Fund Balance/Net Assets Levels Governmental Funds General Fund Purpose — The General Fund is a major fund and the general operating fund of the Government. It is used to account for all activities that are not accounted for in another fund. Fund Balance — Unrestricted fund balance shall be maintained at a level between 2030% and ............... 33,050,% of the subsequent fiscal year's expenditures. Should the unrestricted fund balance drop below the 2.G30% level, notification will be given to the Village Board and ....:t2...:th...._�:::i.h.a.ICnc.2. Cormmirnlissiion. I otlifiicatiiorn sllnoulld iirocllude if the decirease lis terror oirair oir �eirirrnaroerot iiun nndrnatuire .............................................................................................................................................................................................................................................................................................................................................................................................p...........................Y....................i........................................................................................................................... . g.!2j a plan deveklawedto return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the 29.30 level will be permitted for operational purposes to cover extraordinary expenditures or bridge a revenue shortfall...(.fulkn„� to tlh iillja.h „il, 2„i „Ipll y nll„). Reductions in the fund balance are meant to be short term only and must be resolved through the implementation of a new permanent revenue source or reduction in expenditure levels. alb.e..e....:t4e 4,94�eye.i ..b.e....:t....a..e. ai- b.t..(�.r...c. o at4ig..... a=....c..a. .a.4uirn.d.....:t ...c.... ,.r.....ex.p.en- u.ir.e.s,..........Any- f -u hd-...Ilaaia Ee iRet....:t.r.a.n,.s fe n::.e.d.....fef. ti ....fRWJP .M .... ..f. r.d. an e.n..9.p.e..,,.. .e.....e.)r &e....F*. 6-4..4e....44- e F ..dmte....t..l:+e. G [... . ve . ......p::::. t. .... r.t.......:f u..r.e........e.ap4a.1...p.neje au..............WheIan........lin..t"�........'u..nrestricted fu�irnd dalance ii]creases al:nove 60 then sur slue foualar]ce ai]ou.uld be used for�o a 1:2 aU:aate.............eu]sion and debit levies b)tof.u.ndCa itaU Prg ecsc toadiu.sttin.e Economic Errerip!.y.................d................o.......«.................... .......0 . L ....................................................................................................................................................................................................................................... ......... with two months' worth of o eo�atirm caslhm in the fund. i"lne Millis e IBoard can use a sulitable ............................................................................................................................................................................................. 2...................................... g................................................................................................................................................................................ g............................................................................................................................................................................. cormmbinadorns of aH oir an of tlhme above, items to make an effectlive use of the suer �lu<Y fund ...................................................................................................................................................................y...............................................................................................................................................................................................................................................................................................................................................................................i.......................................................... balance. 2 5 Fund balance for the General fund will be capped at 50% of the subsequent fiscal year's expenditures. If at any time this fund balance exceeds the cap, the Village Board will be mandated to transfer excess funds in an amount sufficient to bring fund balance below the cap. 3 6 Special Revenue Funds (excluding CDBG, Asset Seizure, DEA Shared Funds, DUI Fine and Business District Funds) Purpose - Used to account for and report the proceeds of specific revenue sources that are legally restricted or committed to expenditures for specified purposes other than debt service or capital projects. Financing — Special revenue funds are provided by a specific annual property tax levy or other restricted and/or committed revenue source. Financing may also be received from other charges for services, etc. Fund Balance — Derived from property taxes (or other restricted revenue source); therefore, legally restricted. The portion of fund balance derived from property taxes will be legally restricted. The remaining fund balance amount (restricted and/or committed) will be targeted at level of between 10% and 25% of the subsequent year's annual budgeted expenditures, not including capital, debt service and transfers. This will be adjusted annually with the adoption of the annual budget. The CDBG Fund is a separate reporting fund where financing is provided through direct grants from the U.S. Department of Housing and Urban Development (HUD). Reporting guidelines for HUD do not permit any balance at year end. As such, there will be no target fund balance level. The Asset Seizure Fund, DEA Shared Funds Fund and DUI Fine Fund do not have a reserve requirement. The recommended fund balance will be equal to the subsequent year's total operating expense. The Business District Fund is used strictly as a pass-through for payments made in conjunction with maintenance of the business district. As such, there will be no target fund balance level. The Il::::conornic IEr ner elnc i=und is created and used to sthen :'tl'ren tl,ne V lase"s finalncial aositiloin ............................. ..............................................................................................g........................y....................................................................................................................................................................................................................g....................................................................................�"...............................................................................�............................................... ai to as fou" uinfor'a':aseen !!'uirHer' enc" ex einditures or, to cover for' uneM!2ged (revenue losses. .................................................................................................................................................g............................................p...............................................................................................................................................................................................1............................................................................................................................................. Tlh�c'^ �/Wagge will try ta:r rr'iaii°ntain two months' worth of ca aa':nu"atiu�Q" cash as a fuuud b laince but it ......................................................R.:.k...................................................'X.............................................................................................................................................................................................................................................IX..........................................9......................................................................................................................................................R......................................... slhioulld not be tlreated as a fund Iballalr'nce Ire wirelrnent. There will l! not Ibe no talr° et fund Iballai°uce ..............................................................................................................................................................................................................................................................................g....................................................................................................................................................................................................................... g................................................................................................... !cevel! foi" Lb. fuand. ................................................................................................................. The Pension Stabilization Fund is cheated to allllocate alternative (revenue sourcesfor tlhe .aensiloin ...................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................I C............................................. olbllli atiloins alllowiiin tlhae �fillllla e to dillrectll albate tlhne annual e'i°nsliorn Ilevlies, Tlhe �/lilllla e willlll th to ...,......................................b.................................................g.......................................................g....................................................................................................................................................................................p............................................................................................................................................g................................................................ allocate as rnuch as osslilblle to the Ii1elrisioln Stalbillhza6oln 1i::und i higrn tlhe (bud et flleaclilbilllilt aelrrriilts p.......................................................................................................................................................................................................................................................x.........................................................................................g..................................................................y....li............................................ but it should not Ibe tlreated as a fund Iballar'ice re uilrerr'ieinit, i lhelre wlillll be no italr et Wind Ib allaiice g..........................................................................................................................................................................................g................................................................................................ Revell for: tl!'rlis fulrrd, ................................................................................................................. Debt Service Fund Purpose — Established to account for financial resources that are restricted, committed, or assigned to expenditures for principal and interest. Financing — The municipality levies an amount or transfers in an amount close to the principal and interest that is anticipated to be paid. Fund Balance —Fund balance derived from property taxes is legally restricted. Fund balance for debt service supported by property taxes shall be maintained at a level equal to 50% of the next interest payment. Any fund balance accumulation should not exceed the amount of the next principal and interest payment due. Fund balance for debt service supported by alternative 4 7 revenues shall be maintained at a level equal to 50% of the next year's principal and interest payment. Should fund balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned draw down of fund balance for debt service funds is permitted only to account for fluctuations in the bond repayment schedule. Surplus fund balance above the minimum level can be used to reduce the Debt Service portion of the property tax levy or the amount of alternative revenues needed to meet the current year's budgeted expenditures. 5 8 Capital Projects Fund Purpose - Established to account for and report financial resources that are restricted, committed, or assigned to expenditures for capital outlay including the acquisition or construction of capital facilities and other capital assets, excluding those types of capital related outflows financed by proprietary funds. Financing — Debt financing, grants, or interfund transfers are used to finance projects. Fund Balance — Considered segregated for maintenance, construction and/or development; therefore, considered committed, restricted, or assigned depending on the intended source/use of the funds. Fund balance shall be maintained at between 25% and 50% of the five-year average for capital expenditures supported by this fund to a maximum of $1 million. Should the fund balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the minimum level will be permitted to cover extraordinary expenditures or high cost projects that occur infrequently. Surplus fund balance above the minimum level can be used to support ongoing capital projects, transferred to support projects in other capital funds or transferred to other funds as designated by the Village Board. Fund balance may be permitted to grow beyond the maximum level to cover anticipated high- cost projects in future years. Proprietary Funds Enterprise Fund Purpose - Established to account for and report financial resources that are invested in capital assets, net of related debt, restricted, or unrestricted for future spending related to the fund. The focus of enterprise fund measurement is upon determination of operating income, changes in net assets, financial position, and cash flows. The generally accepted accounting principles applicable are those similar to businesses in the private sector. Enterprise funds are required to account for operations for which a fee is charged to external users for goods or services and the activity (a) is financed with debt that is solely secured by a pledge of the net revenues, (b) has third party requirements that the cost of providing services, including capital costs, be recovered with fees and charges or (c) establishes fees and charges based on a pricing policy designed to recover similar costs. Financing— User fees, debt financing, or grants are used to finance operations, capital outlay and improvements, and debt service retirements. Net Assets — Considered invested in capital assets net of related debt (for amounts capitalized as capital assets, less the outstanding debt related to the acquisition of said assets). Restricted net assets relate to bond covenant reserves as outlined in the bond ordinance. Unrestricted net asset targets should represent no less than three months of the subsequent year's operating expenses (excluding debt service and capitalized asset expenses). Planned drawdown of the unrestricted net asset balance below the three-month level will be permitted for operational purposes to cover extraordinary expenditures or bridge a revenue shortfall. Reductions in the balance are meant to be short term only and must be resolved through a fee adjustment dictated by a water and sewer rate study, implementation of a new permanent revenue source or reduction in expenditure levels. Surplus balances in unrestricted net assets above the three-month level can be used to support ongoing water and sewer capital projects or to defer or decrease future rate increases. 6 9 Internal Service Fund Purpose - Established to account for and report financial resources that are invested in capital assets, net of related debt, restricted, or unrestricted for future spending related to the fund. The focus of internal service fund measurement is upon determination of operating income, changes in net assets, financial position, and cash flows. The generally accepted accounting principles applicable are those similar to businesses in the private sector. Internal service funds are used to account for the financing of goods or services provided by an activity to other departments, funds or component units of the Government on a cost -reimbursement basis. Financing — User fees charged to other departments, funds, or component units, or debt financing are used to finance operations, capital outlay and improvements, and debt service retirements. Net Assets — Considered invested in capital assets net of related debt (for amounts capitalized as capital assets, less the outstanding debt related to the acquisition of said assets). Restricted net assets relate to bond covenant reserves as outlined in the bond ordinance. Unrestricted net asset targets should represent appropriate levels given the activity of the fund and the discretion of the Board and management (excluding debt service and capitalized asset expenses). Fund balance for the Risk Management Fund shall be maintained at a level equal to unpaid claims liability (as prepared by enrolled actuary), plus 33% of the self-insured retention level for general liability claims, plus 33% of the subsequent fiscal year's expenditures for workers' compensation claims. Should the unrestricted balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the minimum level will be permitted for operational purposes to cover extraordinary expenditures or to reduce the impact of increasing premiums or claims experience from health, workers' compensation or liability coverages. Reductions in the fund balance are meant to be short term only and must be resolved through rate adjustments, implementation of a new permanent revenue source or reduction in expenditure levels. Surplus fund balance above the minimum level may be used to defer or reduce payments needed to support risk management operations. Fund balance for the Vehicle Maintenance Fund shall be targeted at level of between 10% and 25% of the subsequent year's annual budgeted expenditures, not including capital, debt service and transfers. This will be adjusted annually with the adoption of the annual budget. Fund balance for the Vehicle Replacement and Computer Replacement Funds shall be maintained at a level sufficient for the ongoing maintenance of computer and motor vehicle machinery and equipment. Sufficiency shall be deemed the amount required to support the replacement of machinery and equipment according to its designated replacement schedule. Should fund balance drop below the minimum level, notification will be given to the Village Board and lease payments by the departments will be adjusted to return balances to the minimum level within a reasonable period of time. Surplus fund balance above the minimum level can be used to reduce future lease payments. 10 Other Considerations In establishing the above policies for unrestricted fund balance/net asset levels, the Government considered the following factors: • The predictability of the Government's 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) • The Government's 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 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) • 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) 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) • Fund balance, Is an accounting teeit� and ma Include noinJ..!,gJd aired, inoin-s endp k� fuind balance, ........................................................................................................................................................................................g.......................................................................................................................................................................................i.........................................................................................p.............................................................................................................................................. The Vililllla �e"s cuirireint General 11=:uu�nd �uu�nirestrlicted fund Ibalaince Ilraetweein 30% to 50% lis Ike �t �iroviidliirn.. .......................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................................... 4.............................................................. y;. 40% tai[ et fund balance which ma e ux:nte to ��/� � irnointllns in Illi olid s eindalble fund Iballaince, ...............................................g.................................................................................................a..............................................................................................................................................................(.............................................................).................................................../.......p............................................................................................................................................ If any of the above factors change, the Government should readdress current unrestricted fund balance/net asset levels to ensure amounts are appropriate. 8 11 Attachment III VILLAGE OF MOUNT PROSPECT, ILLINOIS FUND BALANCE/NET ASSETS POLICY Purpose A Fund Balance/Net Assets Policy establishes a minimum level at which the projected end -of -year fund balance/net assets must observe, as a result of the constraints imposed upon the resources reported by the governmental and proprietary funds. This policy is established to provide financial stability, cash flow for operations, and the assurance that the Village of Mount Prospect will be able to respond to emergencies with fiscal strength. More detailed fund balance financial reporting and the increased disclosures will aid the user of the financial statements in understanding the availability of resources. It is the Village's philosophy to support long-term financial strategies, where fiscal sustainability is its first priority, while also building funds for future growth. It is essential to maintain adequate levels of fund balance/net assets to mitigate current and future risks and to ensure tax rates. Fund balance/net asset levels are also crucial in long-term financial planning. Credit rating agencies carefully monitor levels of fund balance/net assets and unassigned fund balance in the General Fund to evaluate the Government's continued creditworthiness. Definitions Governmental Funds The fund balance will be composed of three primary categories: 1) Nonspendable Fund Balance — portion of a Governmental Fund's fund balance that is not available to be spent, either in the short-term or long-term, or through legal restrictions (e.g., inventories, prepaid items, land held for resale and endowments). 2) Restricted Fund Balance — portion of a Governmental Fund's fund balance that is subject to external enforceable legal restrictions (e.g., grantor, contributor and property tax levies). 3) Unrestricted Fund Balance — is made up of three components: a. Committed Fund Balance —the portion of a Governmental Fund's fund balance with self-imposed constraints or limitations that have been placed at the highest level of decision making through formal Board action. The same action is required to remove the commitment of fund balance. b. Assigned Fund Balance — the portion of a Governmental Fund's fund balance to denote an intended use of resources but with no formal Board action. c. Unassigned Fund Balance — available expendable financial resources in a governmental fund that are not the object of tentative management plans. Some funds are funded by a variety of resources, including both restricted and unrestricted (committed, assigned and unassigned). The Government assumes that the order of spending fund balance is as follows: restricted, committed, assigned, unassigned. 1 12 Proprietary Funds Proprietary funds include enterprise and internal service funds. The net assets will be composed of three primary categories: 1) Invested in Capital Assets, Net of Related Debt — portion of a proprietary fund's net assets that reflects the fund's net investment in capital assets less any amount of outstanding debt related to the purchase/acquisition of said capital assets. Related debt, for this purpose, includes the outstanding balances of any bonds, mortgages, notes, or other borrowings that are attributable to the acquisition, construction, or improvement of capital assets of the Government. 2) Restricted Net Assets — portion of a proprietary fund's net assets that are subject to external enforceable legal restrictions (e.g., grantor, contributor and bond covenants). 3) Unrestricted Net Assets — portion of a proprietary fund's net assets that is neither restricted nor invested in capital assets (net of related debt). Authority Governmental Funds Committed Fund Balance — A self-imposed constraint on spending the fund balance that must be approved by ordinance or resolution of the Board. Any modifications or removal of the self-imposed constraint must use the same action used to commit the fund balance. Formal action to commit fund balance must occur before the end of the fiscal year. The dollar amount of the commitment can be determined after year end. Assigned Fund Balance —A self-imposed constraint on spending the fund balance based on the Government's intent to use the fund balance for a specific purpose. The authority may be delegated to members of the management team by the Board. Minimum Unrestricted Fund Balance/Net Assets Levels Governmental Funds General Fund Purpose — The General Fund is a major fund and the general operating fund of the Government. It is used to account for all activities that are not accounted for in another fund. Fund Balance — Unrestricted fund balance shall be maintained at a level between 30% and 50% of the subsequent fiscal year's expenditures. Should the unrestricted fund balance drop below the 30% level, notification will be given to the Village Board and to the Finance Commission. Notification should include if the decrease is temporary or permanent in nature, and a plan to return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the 30% level will be permitted for operational purposes to cover extraordinary expenditures or bridge a revenue shortfall (subject to the Village Board approval). Reductions in the fund balance are meant to be short term only and must be resolved through the implementation of a new permanent revenue source or reduction in expenditure levels. When the unrestricted fund balance increases above 60%, the surplus fund balance should be used for: a) to abate pension and debit levies b) to fund Capital Projects c) to adjust the Economic Emergency Fund to keep up to two months' worth of operating cash in the fund. The Village Board can use a suitable combination of all or any of the above items to make an effective use of the surplus fund balance. Fund balance for the General fund will be capped at 50% of the subsequent fiscal year's expenditures. If at any time this fund balance exceeds the cap, the Village Board will be mandated to transfer excess funds in an amount sufficient to bring fund balance below the cap. 2 13 Special Revenue Funds (excluding CDBG, Asset Seizure, DEA Shared Funds, DUI Fine and Business District Funds) Purpose - Used to account for and report the proceeds of specific revenue sources that are legally restricted or committed to expenditures for specified purposes other than debt service or capital projects. Financing — Special revenue funds are provided by a specific annual property tax levy or other restricted and/or committed revenue source. Financing may also be received from other charges for services, etc. Fund Balance — Derived from property taxes (or other restricted revenue source); therefore, legally restricted. The portion of fund balance derived from property taxes will be legally restricted. The remaining fund balance amount (restricted and/or committed) will be targeted at level of between 10% and 25% of the subsequent year's annual budgeted expenditures, not including capital, debt service and transfers. This will be adjusted annually with the adoption of the annual budget. The CDBG Fund is a separate reporting fund where financing is provided through direct grants from the U.S. Department of Housing and Urban Development (HUD). Reporting guidelines for HUD do not permit any balance at year end. As such, there will be no target fund balance level. The Asset Seizure Fund, DEA Shared Funds Fund and DUI Fine Fund do not have a reserve requirement. The recommended fund balance will be equal to the subsequent year's total operating expense. The Business District Fund is used strictly as a pass-through for payments made in conjunction with maintenance of the business district. As such, there will be no target fund balance level. The Economic Emergency Fund is created and used to strengthen the Village's financial position and to pay for unforeseen emergency expenditures or to cover for unexpected revenue losses. The Village will try to maintain two months' worth of operating cash as a fund balance, but it should not be treated as a fund balance requirement. There will be no target fund balance level for this fund. The Pension Stabilization Fund is created to allocate alternative revenue sources for the pension obligations, allowing the Village to directly abate the annual pension levies. The Village will try to allocate as much as possible to the Pension Stabilization Fund, when the budget flexibility permits but it should not be treated as a fund balance requirement. There will be no target fund balance level for this fund. Debt Service Fund Purpose — Established to account for financial resources that are restricted, committed, or assigned to expenditures for principal and interest. Financing — The municipality levies an amount or transfers in an amount close to the principal and interest that is anticipated to be paid. Fund Balance —Fund balance derived from property taxes is legally restricted. Fund balance for debt service supported by property taxes shall be maintained at a level equal to 50% of the next interest payment. Any fund balance accumulation should not exceed the amount of the next principal and interest payment due. Fund balance for debt service supported by alternative 3 14 revenues shall be maintained at a level equal to 50% of the next year's principal and interest payment. Should fund balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned draw down of fund balance for debt service funds is permitted only to account for fluctuations in the bond repayment schedule. Surplus fund balance above the minimum level can be used to reduce the Debt Service portion of the property tax levy or the amount of alternative revenues needed to meet the current year's budgeted expenditures. Capital Projects Fund Purpose - Established to account for and report financial resources that are restricted, committed, or assigned to expenditures for capital outlay including the acquisition or construction of capital facilities and other capital assets, excluding those types of capital related outflows financed by proprietary funds. Financing — Debt financing, grants, or interfund transfers are used to finance projects. Fund Balance — Considered segregated for maintenance, construction and/or development; therefore, considered committed, restricted, or assigned depending on the intended source/use of the funds. Fund balance shall be maintained at between 25% and 50% of the five-year average for capital expenditures supported by this fund to a maximum of $1 million. Should the fund balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the minimum level will be permitted to cover extraordinary expenditures or high cost projects that occur infrequently. Surplus fund balance above the minimum level can be used to support ongoing capital projects, transferred to support projects in other capital funds or transferred to other funds as designated by the Village Board. Fund balance may be permitted to grow beyond the maximum level to cover anticipated high- cost projects in future years. Proprietary Funds Enterprise Fund Purpose - Established to account for and report financial resources that are invested in capital assets, net of related debt, restricted, or unrestricted for future spending related to the fund. The focus of enterprise fund measurement is upon determination of operating income, changes in net assets, financial position, and cash flows. The generally accepted accounting principles applicable are those similar to businesses in the private sector. Enterprise funds are required to account for operations for which a fee is charged to external users for goods or services and the activity (a) is financed with debt that is solely secured by a pledge of the net revenues, (b) has third party requirements that the cost of providing services, including capital costs, be recovered with fees and charges or (c) establishes fees and charges based on a pricing policy designed to recover similar costs. Financing— User fees, debt financing, or grants are used to finance operations, capital outlay and improvements, and debt service retirements. Net Assets — Considered invested in capital assets net of related debt (for amounts capitalized as capital assets, less the outstanding debt related to the acquisition of said assets). Restricted net assets relate to bond covenant reserves as outlined in the bond ordinance. Unrestricted net asset targets should represent no less than three months of the subsequent year's operating expenses (excluding debt service and capitalized asset expenses). 4 15 Planned drawdown of the unrestricted net asset balance below the three-month level will be permitted for operational purposes to cover extraordinary expenditures or bridge a revenue shortfall. Reductions in the balance are meant to be short term only and must be resolved through a fee adjustment dictated by a water and sewer rate study, implementation of a new permanent revenue source or reduction in expenditure levels. Surplus balances in unrestricted net assets above the three-month level can be used to support ongoing water and sewer capital projects or to defer or decrease future rate increases. Internal Service Fund Purpose - Established to account for and report financial resources that are invested in capital assets, net of related debt, restricted, or unrestricted for future spending related to the fund. The focus of internal service fund measurement is upon determination of operating income, changes in net assets, financial position, and cash flows. The generally accepted accounting principles applicable are those similar to businesses in the private sector. Internal service funds are used to account for the financing of goods or services provided by an activity to other departments, funds or component units of the Government on a cost -reimbursement basis. Financing — User fees charged to other departments, funds, or component units, or debt financing are used to finance operations, capital outlay and improvements, and debt service retirements. Net Assets — Considered invested in capital assets net of related debt (for amounts capitalized as capital assets, less the outstanding debt related to the acquisition of said assets). Restricted net assets relate to bond covenant reserves as outlined in the bond ordinance. Unrestricted net asset targets should represent appropriate levels given the activity of the fund and the discretion of the Board and management (excluding debt service and capitalized asset expenses). Fund balance for the Risk Management Fund shall be maintained at a level equal to unpaid claims liability (as prepared by enrolled actuary), plus 33% of the self-insured retention level for general liability claims, plus 33% of the subsequent fiscal year's expenditures for workers' compensation claims. Should the unrestricted balance drop below the minimum level, notification will be given to the Village Board and a plan developed to return the balance to the minimum level within a reasonable period of time. Planned drawdown of fund balance below the minimum level will be permitted for operational purposes to cover extraordinary expenditures or to reduce the impact of increasing premiums or claims experience from health, workers' compensation or liability coverages. Reductions in the fund balance are meant to be short term only and must be resolved through rate adjustments, implementation of a new permanent revenue source or reduction in expenditure levels. Surplus fund balance above the minimum level may be used to defer or reduce payments needed to support risk management operations. Fund balance for the Vehicle Maintenance Fund shall be targeted at level of between 10% and 25% of the subsequent year's annual budgeted expenditures, not including capital, debt service and transfers. This will be adjusted annually with the adoption of the annual budget. Fund balance for the Vehicle Replacement and Computer Replacement Funds shall be maintained at a level sufficient for the ongoing maintenance of computer and motor vehicle machinery and equipment. Sufficiency shall be deemed the amount required to support the replacement of machinery and equipment according to its designated replacement schedule. Should fund balance drop below the minimum level, notification will be given to the Village Board and lease payments by the departments will be adjusted to return balances to the minimum level i [: within a reasonable period of time. Surplus fund balance above the minimum level can be used to reduce future lease payments. Other Considerations In establishing the above policies for unrestricted fund balance/net asset levels, the Government considered the following factors: • The predictability of the Government's 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) • The Government's 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 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) • 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) • 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) • Fund balance is an accounting term and may include non -liquid and non -spendable fund balance. The Village's current General Fund unrestricted fund balance between 30% to 50% is kept providing 40% target fund balance, which may equate to 33% (4 months) in liquid/spendable fund balance. If any of the above factors change, the Government should readdress current unrestricted fund balance/net asset levels to ensure amounts are appropriate. 6 17