Fund balance refers to the difference between assets and liabilities in the governmental funds balance sheet. This information is one of the most widely used elements of state and local government financial statements. Users of financial statements examine fund balance information for a variety of reasons such as identifying the available resources that can be used to repay long-term debt, or determining whether a government has the necessary resources to pay for new programs, or the continuance or expansion of existing programs.
Fund balance carries the potential to be misunderstood, even by seasoned users of financial statements. In order to enhance the clarity of this information, GASB issued Statement No. 54, Fund Balance Reporting and Governmental Fund Type Definitions, in March of 2009.
Some early adopters (about two percent of the credits in the CreditScope universe) provided the information in the new format in their 2009 Comprehensive Annual Financial Reports, with a handful of others (roughly seven percent) following suit in their 2010 CAFRs. The remaining majority of credits transitioned over to this new reporting format in 2011.
Statement 54 was designed to improve financial reporting by establishing fund balance classifications that are easier to understand and apply. It established a hierarchy based on the extent to which a government is bound to observe spending constraints that govern how it can use amounts reported in the governmental funds balance sheet.
Statement 54 establishes the following classifications and the relative strength of the constraints that control how specific amounts can be spent:
- Nonspendable fund balance includes amounts that are not in a spendable form (inventory) or are required to be maintained intact (endowment trust).
- Restricted fund balance includes amounts that can be spent only for the specific purposes stipulated by external resource providers (grant providers), constitutionally, or through enabling legislation (that is, legislation that creates a new revenue source and restricts its use). Effectively, restrictions may be changed or lifted only with the consent of resource providers.
- Committed fund balance includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority. Commitments may be changed or lifted only by the government taking the same formal action that originally imposed the constraint.
- Assigned fund balance comprises amounts intended to be used by the government for specific purposes. Intent can be expressed by the governing body, an official or body to which the governing body delegates the authority. In governmental funds other than the general fund, assigned fund balance represents the amount that is not restricted or committed. This indicates that resources in other governmental funds are, at a minimum, intended to be used for the purpose of that fund.
- Unassigned fund balance is the residual classification for the general fund and includes all amounts not contained in the other classifications. Unassigned amounts are technically available for any purpose. If another governmental fund has a fund balance deficit, then it will be reported as a negative amount in the unassigned classification in that fund. Positive unassigned amounts will be reported only in the general fund.
These additional field designations (and the detailed definitions provided by GASB) greatly increase the transparency of fund balance reporting from the old methodology. To better accommodate these changes, Merritt has added the following two new ratios to the database:
- Assigned Fund Balance + Unassigned Fund Balance/General Fund Revenues
- Assigned Fund Balance + Unassigned Fund Balance/Expenses
While these ratios are designed to ultimately replace Unreserved Fund Balance/General Revenues and Unreserved Fund Balance/Expenses, the original ratios using the old format are still available, but are not directly comparable.
The original ratios were compiled to reflect the amount of unreserved funds the government had available to meet its obligations.
Using the both the unassigned fund balance amounts (which have no restrictions whatsoever) plus the assigned fund amounts (which are intended to be used for a specific purpose, but are not legally or politically restricted in any way) allows us to arrive at as close a comparable numerator and ratio as possible.