Why This Audit Was Done
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September 29, 2010 General Fund Reserves And Fund Balance The Deficiencies Fund has Sam M. McCall, Ph.D., CPA, CGFM, CIA, CGAP City Auditor decreased from $26.8 million to $5.3 million in the five years from HIGHLIGHTS FY 2004 to FY 2009. Highlights of City Auditor Report #1024, a report to the City Commission and City management WHY THIS AUDIT WAS DONE WHAT WE FOUND The purpose of this audit was to answer the In our audit of the City’s General Fund following questions: Reserves and fund balance we determined that • What are the balances of the various components • The Deficiencies Fund has decreased of the fund balance of the General Fund, which significantly from $26.8 million to $5.3 includes any applicable reserves? million during the six year period (FY • What activities/factors have impacted the 2004 to FY 2009) we examined; decrease in the Deficiencies Fund over time? • The causes of the decrease included; • What are the best practices relating to fund o Transfers to the Fire Services Fund, balance and specifically reserves? o Accounting for the debt associated • Is the current status of the City’s General Fund’s with the acquisition of the fund balance and reserves in accordance with Renaissance Center, established policies and best practices? and o Transfers to StarMetro, • How well does the City’s policy relating to General Fund reserves and fund balance meet o ...
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Sam M. McCall, Ph.D., CPA, CGFM, CIA, CGAP City Auditor HIGHLIGHTSHighlights of City Auditor Report #1024, a report to the City
Transf ers to the Fire Services Fund 33%
Advances to Building Code Enf orcement Fund 13%
Star Metro Transf ers in Excess of Budget 13%
Debt f rom the Purchase of the Renaissance Center 27%
Other 3% Revenue Shortf alls and Expenditures in Excess of Budget 11%
September 29, 2010 General Fund Reserves And Fund Balance The Deficiencies Fund has decreased from $26.8 million to $5.3 million in the five years from FY 2004 to FY 2009. WHAT WE FOUND In our audit of the City’s General Fund Reserves and fund balance we determined that
•The Deficiencies Fund has decreased significantly from $26.8 million to $5.3 million during the six year period (FY 2004 to FY 2009) we examined; •The causes of the decrease included; oTransfers to the Fire Services Fund, oAccounting for the debt associated with the acquisition of the Renaissance Center, oTransfers to StarMetro, oAdvances to the Building Code enforcement Fund, and oRevenue shortfalls and Expenditures in excess of budgeted amounts •The City has incorporated many of the best practices related to fund balance and reserves put forth by the Government Finance Officers Association and bond rating agencies into its policies, •The Governmental Accounting Standards Board has issued a new standard that will change how the City reports its General Fund reserves and fund balance. WHAT WE RECOMMEND We recommended that improvements be made to the reporting of the status and activities of the Deficiencies Fund. We also made recommendations relating to the replenishment of the Deficiencies Fund.
______________________________Office of the City Auditor
Audit of the Fund Balance of the General Fund
AUDIT REPORT #1024
September 29, 2010
Sam M. McCall, Ph.D., CPA, CGFM, CIA, CGAP, City Auditor
TABLE OF CONTENTS
Executive Summary.......................................................................................................... 1
Financial Condition ................................................................................................................... 1 City Policy .................................................................................................................................. 4 Conclusion .................................................................................................................................. 5 Scope, Objectives & Methodology........................................................................... 7 Background............................................................................................................................ 8
Financial Condition of the General Fund.......................................................... 10
Fund Balance ........................................................................................................................... 10 Transfers to the Fire Services Fund....................................................................................... 14 Debt from the acquisition of the Renaissance Center .......................................................... 15 Transfers to Star Metro..........................................................................................................15 Advances to the Building Code Enforcement Fund ............................................................. 16 Revenue Shortfalls and Expenditures in Excess of Budget ................................................. 16 Summary .................................................................................................................................. 17 Best Practices....................................................................................................................... 17 Government Finance Officers Association............................................................................ 18 Rating Agencies........................................................................................................................18 Conclusion ................................................................................................................................ 21
City Policy............................................................................................................................. 21
Reserves .................................................................................................................................... 22 Income and Transfers ............................................................................................................. 23 Conclusion ................................................................................................................................ 24
Reporting Standard......................................................................................................... 26
Conclusion............................................................................................................................. 30
Appointed Official’s Response.......................................................................................... 32 Appendix A Proposed Action Plan................................................................. 33
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General Fund Reserves and Fund Balance
Report #1024
Summary
Sam M. McCall, Ph.D., CPA, CGFM, CIA, CGAP City Auditor September 29, 2010
The General Fund of the City of Tallahassee is the predominant fund for recording and reporting the general government activities of the
City. The City’s administrative and management activities, the
police department, cultural and recreation activities, and human
services activities are examples of the operations of the City that are
accounted for in the General Fund.
This audit examined the fund balance of the General Fund and its
constituent parts, specifically the Deficiencies Fund. We identified
several major factors that significantly decreased the balance in the
Deficiencies Fund from $26.8 million to $5.3 million during the six-year period FY2004 through FY2009. We also looked into what
best practices have been established for managing the fund balance
and what funding level is recommended for the Deficiencies Fund. A
third area we reviewed was the policy that governs the Deficiencies
Fund. Finally, we reviewed a new standard that has been established
by the Governmental Accounting Standards Board. The new
standard, GASB 54Fund Balance Reporting and Governmental
Fund Type Definitionshow the fund balance of the City’s, addresses General Fund will be reported in the future and will be effective for
the City’s September 30, 2011 annual financial statements.
Financial Condition Our examination of the fund balance of the General Fund showed
that the fund balance is currently comprised of four basic elements;
(1) encumbrances, (2) inventory, (3) advances to other funds, and (4)
the Deficiencies Fund. Encumbrances represent commitments
related to contracts not yet performed and orders not yet filled.
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Audit of General Fund Reserves
Inventory is the value of goods held for future use. Advances to
Other Funds are the value of loans to other funds to make up for budgetary shortfalls in those other funds. The Deficiency Fund is the remaining portion of the fund balance and represents funds held
for use in times of need. A review of the total fund balance over the six-year period (2004-
2009) shows a significant decrease in the total fund balance. This decrease was caused almost entirely by reductions to the Deficiencies Fund.
In 2004 the total fund balance was $27.8 million of which $26.8
million was in the Deficiencies Fund. At the end of fiscal year 2009 the total fund balance had fallen to $8.9 million and only $5.3 million was in the Deficiencies Fund. This is a $21.5 million
reduction in the Deficiencies Fund over the six-year period.
$30.0 $25.0 $20.0 $15.0 $10.0
$5.0
$-
Total Fund Balance and Deficiencies Fund Balance (in Millions)
$27.8 $26.8 $20.4 $19.2
2004
2005
$12.1$11.2$9.9 $8.1 $7.3 $5.1
2006
2007 2008
Total Fund Balance Deficiencies Fund
$8.9
2009
$5.3
We identified several reasons for the decrease in the Deficiencies
Fund. Those reasons include: •Transfers to the Fire Services Fund (approximately $7.1 million),
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Audit of General Fund Reserves
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•
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Report #1024
The accounting treatment of the recording of debt from the
acquisition of the Renaissance Center (approximately $5.7
million),
Transfers to Star Metro that exceeded the amount budgeted
to be transferred (approximately $2.8 million),
Advances (loans) to the Building Code Enforcement Fund in fiscal years 2007, 2008, and 2009; this did not cause a
decrease in the total fund balance of the General Fund, only a
reclassification of monies from the Deficiencies Fund to
Advances to Other Funds (approximately $2.8 million), and
•Revenue shortfalls and expenditures in excess of budgeted
amounts (approximately $2.2 million).
In total these five items account for nearly all the reduction in the
Deficiencies Fund shown in the City’s financial statements.
Best Practices
We identified several best practices relating to the management of
General Fund’s fund balance and the Deficiencies Fund. Those best
practices were put forth by the Government Finance Officers
Association (GFOA) and the agencies that analyze the credit
worthiness of the City and rate the risk to investors that loan money
to the City.
The GFOA recommends that local governments maintain an
unreserved fund balance or “rainy day fund (the equivalent of the Deficiencies Fund for the City) of two months of operating revenues
or expenditures. For the City, based on FY 2009 budgeted
expenditures and transfers of $132 million, the Deficiencies Fund
should be maintained at approximately $22 million. As previously
noted, the balance was above that level in FY 2004 at $26.8 million
and as of the end of FY 2009 the balance was $5.3 million.
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Audit of General Fund Reserves
The rating agencies (Fitch Inc. and Moody’s Investor Services) recommend local governments have a written policy that outlines the requirement for a “rainy day fund and that the policy stipulates when and how it can be used. Our review showed that the City has a policy (Commission Policy 224, Financing the Government) in place
that addresses both fund balance and reserves, as recommended.
City Policy We reviewed Commission Policy 224, Financing the Government, which is the City policy that governs the Deficiency Fund. The policy sets the level of the Deficiencies Fund to be at a maximum of two months operating expenditures, which is roughly in line with the recommendation by the GFOA. Based on our review of the policy
we made three recommendations, which if implemented will strengthen the management of the Deficiencies Fund and increase the transparency of the uses of the Deficiencies Fund.
Those recommendations include: (1) defining or replacing the term
“used sparingly as it relates to drawing funds from the Deficiencies Fund, (2) requiring requests for approval for the use of funds from
the Deficiencies Fund to specifically identify the request as a draw
down of the Deficiencies Fund, and (3) the annual budgetary closeout process include a separate schedule that shows any change in the Deficiencies Fund and what occurred during the past year that
caused the change.
Reporting Standard In March of 2009, the Governmental Accounting Standards Board
(GASB) issued a new standard that will change how the City reports its fund balance for governmental funds. That standard, GASB Statement No. 54Fund Balance Reporting and Governmental Fund Type Definitions, (effective for periods beginning after June 15, 2010) will require the City to reclassify the current amounts reported
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Report #1024
in the fund balance of the General Fund into at most five separate
classifications. The determination on how the currently reported
amount will be reclassified will be based on the level of restrictions
placed on the City’s ability to expend those funds. Those five classifications are:
•Non-spendable,
•Restricted fund balance,
•Committed fund balance,
•Assigned fund balance, and
•Unassigned fund balance. As it relates to this audit, the new standard will have the effect of
changing the Deficiencies Fund from being reported as unreserved
designated. We recommend that the portion of the fund balance the
City Commission intends to set aside for “rainy day use be reported
as committed fund balance.
After consulting with management it was clear that Accounting Services was already aware of this new standard and was making
plans for its implementation when required.
Conclusion As previously stated, the Deficiencies Fund has significantly decreased from where it was in 2004. While the fund has been used
for its intended purpose, allowing the City to continue to provide necessary services, the City Commission recognized the need for the fund to return to a safe level and has directed management to
deliberatively replenish the fund over a five to seven year period. We will conduct follow-up reports to address the City’s progress
toward building the Deficiencies Fund back up to the identified goal
of $23 million. We will conduct such follow-up work until the City
Commission is satisfied that the target level for the Deficiency Fund
has been reached.
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Report #1024
Audit of General Fund Reserves
We would like to acknowledge the full and complete cooperation
and support of management and staff from the Department of
Management and Administration, specifically the Office of Budget
and Policy and Accounting Services.
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