Fund Balance Reporting
Fund Overview
Governments (such as school districts) usually organize their accounting systems on a "fund" basis. A fund is a separate set of accounting records, segregated for purpose of carrying on an activity and established for accountability purposes to demonstrate that financial resources are being used only for permitted purposes.
The Wisconsin Department of Public Instruction (DPI) specifies the various funds required to be used by Wisconsin school districts. All school districts have a General Fund and may have one or more other funds to account for specific activities. For example, special education activities are accounted for in the Special Education Fund. Transactions relating to payment of general obligation debt are accounted for in a debt service fund.
Fund Terminology
A fund will have "balance sheet" accounts consisting of "assets," "liabilities" and "fund balance" and a series of "revenue" and "expenditure" accounts. A "fund balance" is created or increased when fund revenues exceed fund expenditures for a fiscal period. Correspondingly, a fund's balance is decreased when fund expenditures exceed fund revenues. The balance sheet accounts identify the assets that belong to a fund--such as cash or a grant payment receivable--and what liabilities it owes, such an accounts payable to a supplier.
The difference between the fund's assets and liabilities equals the "fund balance." A positive fund balance represents a financial resource available to finance expenditures of a following fiscal period. A deficit fund balance can only be recovered by having revenues exceed expenditures in a following fiscal period.
Understanding the Fund Balance
Administrators and board members need to understand what a fund balance is and its importance in budgeting decisions. A common misconception is that fund balance is a cash account and therefore corresponds to the district's bank balance. As discussed above, fund balance represents the fund's total assets minus its liabilities (what a fund owns minus what it owes). Cash is an asset, but it usually is not a fund's only asset. The fund may also have liabilities, such as an accounts payable amount due a supplier that could result in a decrease in fund cash when they are paid off.
Fund Balance Classifications
A definition of the five different fund balance classifications as outline in GASB Statement 54 follows:
Nonspendable Fund Balance
The nonspendable fund balance classification includes amounts that cannot be spent because they are either not in spendable form or legally or contractually required to be maintained intact. This would include items not expected to be converted to cash including inventories and prepaid amounts. It may also include the long-term amount of loans and receivables as well as property acquired for resale and the corpus (principal) of a permanent fund.
Restricted Fund Balance
The restricted fund balance classification should be reported when constraints placed on the use of resources are either externally imposed by creditors, grantors, contributors or laws or regulations of other governments, or imposed by law through constitutional provisions or enabling legislation.
Committed Fund Balance
The committed fund balance classification reflects specific purposes pursuant to constraints imposed by formal action of the district's highest level of decision-making authority (generally the governing board). Also, such constraints can only be removed or changed by the same form of formal action.
Assigned Fund Balance
The assigned fund balance classification reflects amounts that are constrained by the government's intent to be used for specific purposes but meet neither the restricted nor committed forms of constraint.
Unassigned Fund Balance
The unassigned fund balance classification is the residual classification for the general fund only. It is also where negative residual amounts for all other governmental funds would be reported.
How Large A Fund Balance?
Determination of an appropriate fund balance is a critical factor in district financial planning and budgeting processes but it is strictly a local matter. DPI makes no recommendation regarding the amount a district should have as its General Fund balance, except that DPI encourages districts to seek legal counsel should they contemplate budgeting for and/or operating with a negative general fund balance.
A district with an appropriate fund balance can:
- avoid excessive short term borrowing thereby avoiding associated interest cost;
- accumulate sufficient assets to make designated purchases or cover unforeseen expenditure needs; and
- demonstrate financial stability and therefore preserve or enhance its bond rating, thereby lowering debt issuance costs.
Fund Balance Size
The most commonly asked question regarding fund balance is how large should it be? Perhaps the best answer would be "an amount sufficient that short term borrowing for cash flow could be avoided and would also allow the district to set aside sufficient assets to realize its longer range goals." However, this may not always be practical or politically possible.