2009-31• 0
RESOLUTION NO. 2009- 31
A RESOLUTION AMENDING THE VILLAGE OF BUFFALO GROVE
FUND BALANCE POLICY
WHEREAS, a local government, as part of it's overall policy development, should establish a formal policy
regarding the level of unreserved fund balance that is to be held for both contingencies and for any other approved
purpose, and
WHEREAS, this policy was established in April 1997 and reflected the financial conditions at that point in
time and due to changing fiscal and financial conditions, this policy must and should be dynamic and reflect changes
in condition or philosophies, and;
WHEREAS, it as been established that the current threshold is set at a level not realistic with the economic
climate and must be adjusted to allow greater operating flexibility, and;
WHEREAS, the Village deems that the new threshold remains prudent and fiscally sound.
NOW, THEREFORE, BE IT RESOLVED BY THE PRESIDENT AND BOARD OF TRUSTEES OF THE
VILLAGE OF BUFFALO GROVE, COOK AND LAKE COUNTIES, ILLINOIS as follows:
1. The Village of Buffalo Grove does hereby amend the Fund Balance Policy, dated August 3, 2009, and
attached hereto as Exhibit "A ".
2. To effectively manage the intent of this Policy in light of the changing accounting nature of Fund
Balance, an annual review of Fund Balance shall be undertaken.
AYES: 6 — Braiman, Glover, Berman, Trilling, Stone, Sussman
NAYES: 0 — None
ABSENT: 0 — None
PASSED: August 3, 2009 APPROVED: August 3, 2009
ATTEST: APPROVED:
Villag Jerk Village President
VILLAGE OF BUFFALO GROVE
POLICIES AND PRACTICES
FUND BALANCE USE - CORPORATE FUND
A major policy decision required of the Village is the establishment of an appropriate level of undesignated fund balance
in the Corporate Fund. The difficulty arose due to a situation where no authoritative guidelines are available to either
plan for or use these balances. To this end, the Government Finance Officers Association published a guide entitled Fund
Balance and Net Assets, which in part discusses this matter and offers some level of guidance for local government.
Research approaches unreserved fund balance from an aspect of both budgetary development and control in periods of
economic uncertainty. Essentially, the focus on the use of unreserved fund balance is to provide for operating
contingencies. Such unreserved balances can provide for operations and continued tax stability should budgetary short
falls develop. However, the development of any policies or guidelines that establish the proper level of unreserved fund
balance is a difficult task, especially in light of the fact that there is no uniform standard regarding the appropriate level of
unreserved fund balance.
There are several reasons that an unreserved fund balance should be maintained and are generally related to the
management of economic uncertainty. Points cited are as follows:
1. Unreserved fund balance can permit the temporary match in revenue to growth in expenditures. The
temporary nature of this match relationship is that some permanent revenue enhancement or expendi-
ture controls must be put in place at an early point beyond the period of balance.
2. Balances can be committed within the budgetary period because of the necessary reliance upon certain
economically sensitive and therefore at times unpredictable revenue sources such as sales and income
taxes along with building fees and licenses.
3. Errors in revenue and expenditure estimation could arise due to the difficulty in identifying the turning
point in a given business cycle.
4. A drop in non - recurring, but previously budget supporting, revenues.
The adequacy of an unreserved fund balance depends upon an accurate assessment of what fiscal uncertainty the Village
faces from time to time. It should be noted that if an unreserved fund balance is to be maintained, it could become a
target for those who will either call for tax reduction or for increased spending, depending upon the particular viewpoint
of the observer.
The consensus of the opinion is that local government, as part of it's overall policy development, should establish a
formal policy regarding the level of unreserved fund balance that is to be held for both contingencies and for any other
approved purpose. The policy provides a purpose for maintaining such balances along with the conditions when the
balances would be expended or committed. The policy would include, but not be limited to the following:
1. When should resources be set aside for contingencies.
2. Under what circumstances would financial resources be committed to unreserved fund balance.
3. How will balances be used.
4. Determining the appropriate size of the fund balance.
Due to changing fiscal and financial conditions, this policy must and should be dynamic and reflect changes in condition
or philosophies.
The key policy determinant is how Unreserved Fund Balance shall be measured and when necessary, used. Several
options have been cited:
Development of a formula to determine an adequate amount such as a fixed percent of budget.
The transfer of any annual surplus into unreserved fund balance as an increment to the base established
formula.
The policy should then address how unreserved fund balances shall be utilized. The policy should address under what
circumstances resources would be used and who should make the decision regarding that use. The primary reason for
this balance is to alleviate unanticipated short-term budgetary problems.
Resource allocation should be grounded in the philosophy of both stabilizing the tax structure and continuing services.
The use of unreserved fund balances should not be used to solve long -term budgetary management problems.
The most difficult task in the development of a policy of this type is determining the appropriate fund size. There
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appears to be two traditional methods employed in determining the size of unreserved fund balances:
1. Allocating financial resources equal to a percentage of annual operating expenditures.
2. Allocating financial resources equal to a certain number of months operating expenditures.
The Village will continue to follow method one where the goal is to peg fund balance as a percentage a subsequent fiscal
year's total approved expenditures. Surprisingly, rating agencies such as Moody's and Standard and Poors view a 5% of
expenditures unreserved fund balance as "adequate." However, they both temper their comments on the overall
economic sensitivity of the revenue base of the particular community under rating review.
As a word of caution, a standard may not be appropriate in the absolute case. To date, there has been no uniform national
standard or rule for use in measuring the amount of resources to set aside since all governments differ to some extent in
terms of their economic and financial characteristics. It has been found appropriate for a unit of government to make its
own decision about whether to set aside more or less funds based on the perception and assessment of the economic
uncertainty facing it. What level should therefore be maintained? The balance relates to the degree of budgetary
uncertainty and exposure anticipated to be faced. Government must evaluate the degree of risk it faces on an annual basis
and make a decision as to the level of financial resources that it wishes to maintain not only for contingencies but for any
transitional budgetary shortfalls. In short, determining the appropriate level of unreserved fund balance is a difficult task.
The ability to recognize an exposure to economic uncertainty as a component of both budget execution and development,
and the commitment to sound levels of financial resources in response to such uncertainty will make units of government
better able to deal with the realities of slowing or stabilizing economies.
Village of Buffalo Grove
Corporate Fund Fund Balance
The Village of Buffalo Grove has analyzed and managed the Corporate Fund Fund Balance as a vehicle for operational
stability for the Fund while providing planned resources for capital development, property tax abatement and pension
cost stability. While much research has gone on in order to determine what the proper level of Fund Balance should be
any thoughts are tempered knowing that the level must not only follow any set standard(s), but must also consider what is
best for Buffalo Grove.
The Corporate Authorities as well as the Village's Finance Committee have reviewed the issue of unreserved Fund
Balance in the Corporate Fund. They have discussed the level of Fund Balance, evaluation of what Fund Balance is and
should be and the difference between cash and investments and Fund Balance.
Additionally, they have considered the prudent use of cash and investment reserves for purposes that are of a recurring
nature while such reserves are theoretically non - recurring. After review and discussion, both the Finance Committee and
President and Board of Trustees recommend the following guidelines:
Cash and investment reserves will be maintained at a level equal to 25% of the operational budget beginning as
of January 1 of any fiscal period. Unreserved Fund Balance will equal, at a minimum, 25% of the subsequent
year's Corporate Fund budget.
Should the Undesignated Fund Balance drop below 25% of the same year's Corporate Fund budget, notification
will be given to the Village's Finance Committee. While identified uses of Fund Balance may be proposed that
could continue the trend below 25% such uses will be disclosed and approved by the Committee.
Draws for operational (recurring) purposes will be only to cover extraordinary circumstances or to bridge a
revenue gap to be resolved by either implementing a new, recurring source of revenue or to permit staff the time
to plan an orderly reduction in expenditure levels.
Permanent draws would be for "investment" or capital purposes or to provide some direct tax levy abatement
funding for capital - related debt service.
Some resources may be committed to cover pension fund shortfalls in annual funding that are determined at the
end of any given calendar accounting period.
These uses of Unreserved Fund Fund Balance are meant to be a guide for direction of identified balances. To effectively
manage the intent of this Policy in light of the changing accounting nature of Fund Balance, an annual review of Fund
Balance shall be undertaken.
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RETAINED EARNINGS -WATER & SEWER FUND
The balance to be maintained as Undesignated Retained Earnings within the Water and Sewer Fund shall be equal to an
amount necessary to provide sufficient cash flow for operations as well as providing a reserve accumulation to pay for
unanticipated capital replacement and repair.
As a operational goal, cash and investment reserves will be maintained in an amount equal to 25% of the water and sewer
operational budgets beginning as of January 1 of any given fiscal period. With this said, the Water and Sewer Fund cash
and investment guideline will be:
1. Cash and investment reserves equal to 25% of the operational budget beginning as of January 1 of any
fiscal period. Unreserved Retained Earnings would at least equal that amount.
April, 1997
Revised - December, 1997
Revised - September, 1999
Revised - August, 2003
Revised -July, 2009