GASB 54: New Standards for Fund Balance Reporting

January 26, 2012

In order to address sometimes inconsistent application of reporting standards for fund balance by governments, the Governmental Accounting Standards Board (GASB) issued GASB Statement No. 54: Fund Balance Reporting and Governmental Fund Type Definitions in February 2009. GASB Statement No. 54 shifts the focus of fund balance reporting from the availability of fund resources for budgeting purposes to the “extent to which the government is bound to honor constraints on the specific purposes for which amounts in the fund can be spent.”[1] GASB required that governments implement the new reporting standards with their FY2011 financial statements, meaning the first statements incorporating the reporting changes are starting to be released by local governments in the Chicago area, starting with governments with a July through June fiscal year. Chicago Public Schools recently released their FY2011 Comprehensive Annual Financial Report with GASB No. 54 modifications.

Fund Balance

Fund balance is a term commonly used to describe the net assets of a governmental fund and serves as a measure of financial resources.[2]

Previous Components of Fund Balance

Previously, the categories for fund balance focused on whether resources were available for appropriation by governments. A variety of external and internal constraints may prevent portions of the fund balance from being available for budgeting. The unreserved fund balance thus referred to resources that did not have any external legal restrictions or constraints. The unreserved fund balance was able to be further categorized as designated and undesignated. A designation was a limitation placed on the use of the fund balance by the government itself for planning purposes or to earmark funds.[3]

New Components of Fund Balance

GASB Statement No. 54 creates five components of fund balance, though not every government or governmental fund will report all components. The five components are:

· Nonspendable fund balance – resources that inherently cannot be spent such as pre-paid rent or the long-term portion of loans receivable. In addition, this category includes resources that cannot be spent because of legal or contractual provisions, such as the principal of an endowment.

· Restricted fund balance – net fund resources subject to legal restrictions that are externally enforceable, including restrictions imposed by constitution, creditors or laws and regulations of non-local governments.

· Committed fund balance – net fund resources with self-imposed limitations set at the highest level of decision-making which remain binding unless removed by the same action used to create the limitation.

· Assigned fund balance – the portion of fund balance reflecting the government’s intended use of resources, with the intent established by government committees or officials in addition to the governing board. Appropriated fund balance, or the portion of existing fund balance used to fill the gap between appropriations and estimated revenues for the following year, would be categorized as assigned fund balance.

· Unassigned fund balance – in the General Fund, the remaining surplus of net resources after funds have been identified in the four categories above.[4]

GFOA Fund Balance Best Practices

The Government Finance Officers Association (GFOA) recommends “at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” Two months of operating expenditures is approximately 17%. The GFOA statement adds that each unit of government should adopt a formal policy that considers the unit’s own specific circumstances and that a smaller fund balance ratio may be appropriate for the largest governments.[5] In accordance with GASB No. 54 modifications, the GFOA identifies unrestricted fund balance as “only resources without a constraint on spending or for which the constraint on spending is imposed by the government itself.” These resources are the combined total of committed fund balance, assigned fund balance and unassigned fund balance.[6]

Chicago Public Schools Fund Balance

The two exhibits below together show ten years of the Chicago Public Schools' general operating fund balance and its ratio to general fund expenditures. Prior to FY2011 and GASB Statement No. 54, the District categorized their unreserved fund balance into designated to provide operating capital and undesignated fund balance. The first chart includes only the unreserved undesignated fund balance to determine the portion of the fund balance without any constraints.[7] Between FY2002 and FY2010, the District’s unreserved undesignated fund balance fluctuated between a low of 0.2% in FY2002 and a high of 4.1% in FY2007 and FY2010.

The following chart presents unrestricted fund balance for FY2011. In this exhibit, the District’s net resources including self-imposed constraints, amount to $520.5 million or 10.6% of general fund expenditures. These resources include those assigned for educational services ($289.0 million), for appropriated fund balance ($181.3 million) and for encumbrances ($44.9 million). The unassigned portion of fund balance – the District’s net resources without constraints, self or externally imposed – amount to approximately $5.3 million, or 0.1% of general fund expenditures.[8] 

 A ten-year trend analysis of the District’s fund balance ratio including the most recent FY2011 numbers is not possible because the data has been classified differently with implementation of GASB No. 54. In the interest of government transparency, the Civic Federation recommends that all local governments, including the Chicago Public Schools, provide 10 years of fiscal data in the GASB No. 54 format in the statistical section of their audited financial statements. Only with reclassified data can an accurate trend analysis be conducted.

[1] Gauthier, Steven, “Fund Balance: New and Improved,” Government Finance Review, April 2009 and GASB Statement No. 54, paragraph 5.
[2] GFOA, Appropriate Level of Unrestricted Fund Balance in the General Fund (Adopted October 2009).
[3]Gauthier, Steven, “Fund Balance: New and Improved,” Government Finance Review, April 2009.
[4] Gauthier, Steven, “Fund Balance: New and Improved,” Government Finance Review, April 2009.
[5] GFOA, Appropriate Level of Unrestricted Fund Balance in the General Fund (Adopted October 2009).
[6] GFOA, Appropriate Level of Unrestricted Fund Balance in the General Fund (Adopted October 2009).
[7] This analysis differs from the CPS fund balance policy which requires the District to maintain an unreserved, designated fund balance in the operating and debt funds of 5% to 10% of the budget for each new fiscal year. For analysis of the District’s fund balance policy, see the Civic Federation’s Chicago Public Schools FY2012 Budget: Analysis and Recommendations
[8] Chicago Public Schools, FY2011 CAFR p. 40.