Fund balance levels: What works for your government?

One of the most common questions governing bodies ask when discussing year-end results is, “How much fund balance should we have?” The answer: it depends. It depends on what fund balance is appropriate for your government to enable flexibility and, at the same time, be fiscally prudent to prevent over-taxing. A formal policy that documents those levels should be an exercise that requires careful analysis of your government’s history and future needs. Establishing such a policy in writing builds consensus among oversight committees and management while allowing for continuity when key stakeholders change over the years.

Many governments fall into the trap of establishing a policy based on the practices of other governments comparable in size and/or locale. However, Baker Tilly state and local government specialists caution against this simplified approach. Each government is unique in its public needs, structure, and plans, and your fund balance levels should reflect those factors. Regardless of the size of your government, the Government Finance Officers Association (GFOA) recommends a minimum unrestricted fund balance in your general fund of no less than two months of regular general fund operating expenditures or revenues, whichever is more predictable. This valuable guidance serves as a standard minimum benchmark, but a detailed analysis of the following factors will provide you with a customized approach that works best for your government:

• Predictability of your revenues and volatility of your expenditures
• Exposure your government has to one-time outlays
• Current, or potentially future, reliance upon your general fund by other government funds
• Specific liquidity needs
• Amount of unrestricted fund balance that is already committed or assigned to other objectives of your government’s operations

Fund balance levels will inevitably fluctuate. Therefore, establishing a targeted range is usually preferred over a set amount or percentage. When fund balance levels decrease because of economic recessions, litigation, state or federal cuts in funding, or other events that the general fund is periodically subject to, your policy should address the method of replenishment. Using non-recurring revenues, budget surpluses, and excess resources that may become available in other funds, such as the closure of a tax increment district, can all be sources for replenishment. Writing this within the policy allows for transparency and consensus over the use of these surplus amounts.

Establishing a written fund balance policy is viewed favorably by bond rating agencies and your auditors. More important, it provides management with the direction and flexibility required to meet the needs of its citizens while being responsible with its taxing authority.

For more information on this topic, or to learn how Baker Tilly state and local government specialists can help, contact our team.