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HomeMy WebLinkAbout05-21-07 Item 2B3, FPAC Update ~ --A~HILLS MEMORANDUM DATE: May 16, 2007 Agenda Item 2.B-3. TO: Honorable Mayor and City Council FROM: Sue Iverson, Finance Director ~ SUBJECT: Financial Planning and Analysis Committee (FP AC) Update BACKGROUND: At the February 20th Council Work Session, the Council discussed the formation of a Financial Planning and Analysis Committee. Council defined the MissionlPurpose of this committee and listed specific outcomes. Specific objectives are to be made by the committee itself to achieve the expected outcomes listed by the City Council. Membership and Council Staff liaison appointments were also discussed. At the March 12th Council meeting, Council approved the formation of the Financial Planning and Analysis Committee, directing staffto advertise for individuals to serve on this committee. At the April 30th Council meeting, Council appointed five members to this committee, Council liaison David Grant, and staff liaison Sue Iverson. DISCUSSION: The Financial Planning and Analysis Committee will hold its first meeting on May 23rd at 7 p.m. The order of business will be to appoint a chair, set meeting schedule and organize the group. Staff will hold a training session on Government Fund Accounting and Budgeting at this meeting to familiarize the committee members with public sector policies and procedures. Staff has attached a copy ofthe training session. Ifthe Council would like, and there is time during the work session, staff will entertain questions and/or go through these training materials as a refresher for the Council. RECOMMENDED ACTION: Staffwill be available for questions or comments. ccounting Sue Iverson Finance Director City of Arden Hills Differences in the Go rnment and Non-Profit Environment . Absence of Individuals with legal claim to the excess of revenues over expenses . Generating net income is not the main goal . Formal and restrictive budgets . Resource providers (taxpayers or donors) may not receive equivalent value in return for the resources given . Resources often have restrictions as to how or when they may be used . Traditional view of the equity accounts must be modified . Budget compliance may be more important then income measurement . Revenue recognition for transactions . Reports must reflect the existence of restrictions on the use of certain resources . Non-financial performance measures are relatively more important 1 STANDARD SETTERS . Federal level - FASAB - Federal Accounting Standards Advisory Board - GAD General Accounting Office - U.S. Treasury Departrnent - OMS - Office of Management and Budget . State and Local Government - GASS - Government Accounting Standards Board . Not-for-profits & Business for-profits - FASS - Financial Accounting Standards Board STANDARD SETTERS . GASB - Formed in 1984 - Covers basIc governments and entities owned or controlled by governments - Forrnedin 1973 - Covers not-for-profits not related 10 government entities (private nonprofit hospitals, colleges, museums, etc.) - Covers Business for-profits - Public and Private GASS Concepts Statements . Citizens have a right to know why resources are being raised and how they will be used . GASB #1 Objectives of Financial Statements - Allow comparison of Actual with budgeted results - Help users assess financial condition and results of operations - Show compliance with laws, rules and regulations - Assist in evaluating efficiency and effectiveness 2 Government vs. Business . There is more emphasis on - The budget - Legal compliance - Efficiency and effectiveness measures other than net income Overview of Basic Fin ncial Statements . Private and Public Business Entities - Balance Sheet - Income Statement - Statement of Cash Flows Overview of Basic Fin ncial Statements . Government-wide Statements - Statement of Net Assets . Similar 10 business balance sheet - Statement of Activities . Similar to business income statement . Fund Financial Statements - Detailed reports of governmental, proprietary, and fiduciary activities 3 Fund Financial State ents Overview . Govemmental - general citizen services - Balance Sheet - Statement of Revenues, Expenditures, and Changes in Fund Balance . Proprietary - business-like activities (Water Sales) - Statement of Net Assets (Balance Sheet) - Statement of Revenues, Expenses, and Changes in Fund Net Assets - Statement of Cash Flows . Fiduciary - holding money in trust for others - statement of Fiduciary Net Assets (Balance Sheet) - Statement of Changes in Fiduciary Net Assets HISTORY OF FUND ACCOUNTING . Need to maintain separate accounting ability over financial resources dedicated for specific purposes. . A government is not treated as a single integral entity. It is viewed as a collection of smaller, separate accounting entities known as funds. . A Fund (is) - Represents a part of the activities of some organization - An accounting entity . Self.balancing set of accounts, reflecting the assets, liabiliUes,nelassetsandchangesinthosebalances - Segregated for specific activities (an fiscal entity) . So as to ensure compliance with appropriate regulations or restrictions 4 Government Fund Types . Governmental - Used for activities that are largely unique to the government environment Proprietary - Business-type activities Fiduciary - Acting as an agent or trustee of monies that generally belong to other parties Governmental Fund Types (5) . Pennanent Fund - Report financial resources that are legally restricted so only earnings, not principal, may be expended, and for purposes to benefit the government and its citizenry . Capital Projects Fund Is used 10 account for the financIal resources available and used for acquisition or construction of GENERAL fixed assets (Le.fixed asselsolherthan Ihal assoclaled with enterprise or fiduciary funds) Ii Debt Service Fund Is used to account for the financial resources available and used for payment of interest and principle on GENERAL long. tenn debt (Le.long-term debt other that that associated with enlerpriseorfiduciaryfunds) Governmental Fund Types (5) . Special Revenue Fund Is used to account for the financial resources provided by revenue sources which are legally restricted to specified purposes {olher lhan capital projecls or debt service) . General Fund - Used to account for financial resources other than those which are required to be accounted for in another fund. Therecan only be one general fund and it accounts for most of the ongoing acUvilies of the governmenl 5 Proprietary Fund Types (2) . Enterprise Fund - An enterprise fund is a fund established for the purpose of measuring net income for a governmental department providing goods or services primarily 10 outside consumers, in which il is the intent of the governmenllhat the department operate on a cosl-recovery or profitable basis.(Le. Water/Sewer) Internal Service Fund An internal service fund is a fund established for the purpose of measuring net income for a governmental department providing services primarily to other departments or agencies within the government, in which it is the intent of the government that the department operate on a cost reimbursement basis. (Le. motor pool, data processing) Fiduciary Fund Types (4) Agency Fund An agency fund is used to account for resources held by a government entity which are not owned by the entity, but which are payable to some outside party, such as another govemmentunit. Investment Trust Fund - Accounts for the external portion of investment pools reported by the sponsoring government PensIon Fund - Used to account for assets provided to pension trusts. The earnings of these assets are used to pay the pensions of public (government) employees Private"Purpose Trust Fund - Report all other trust arrangements How Many Funds Do You Need? . Must have only ONE general fund . May not need one of every fund type - No outst~lnding long-term debt? Don't need a debt service fund. May have more than one of some types - Three bullding projects, may have three capital projects funds. . Exact number depends on judgment Use the minimum number that will allow compliance with legal and other restrictions. 6 Budget in Government Accounting . Every government should adopt an annual budget . Accounting system should make it possible to compare actual and budgeted results . Budget VB. actual comparisons are included in the required supplemental information for the general fund and special revenue funds for which an annual budget is adopted. Double Entry Accountin~ . Even if the computer does the work - you still need to understand, especially if an error occurs. . Use T accounts to solve problems. Uniform Chart of Accounts . Recommended by the State Auditors Office - Designed for cities over 2,500 population - Cities under 2,500 population are encouraged t6 adopt - Suggested format is xxx-xxxxx-xxx (expenses) _1.tthree-fundlype . 2nd five-funclion or department . 3"" lhree-object orlype of expense 7 Basis of Accounting . Refers to the point in time when a local government recognizes (records a transaction) revenues, expenditures/expenses, assets and liabilities in the journal to be reflected in the financial statements. . Currently there are three basis of accounting that are used by local government entities. Basis of Accounting . Cash basis - Records transactions only when local government receives or pays out cash. - Allowed for local governments under 2,500 population in MN, but not encouraged by the State Auditors Office. Basis of Accounting . Accrual basis - Records transactions as they occur, regardless of when cash is received or paid out. - Must be used for proprietary fund types and most fiduciary funds (Measurable and Earned) 8 Basis of Accounting . Modified Accrual basis - Records transactions when Measurable & Available. - Available means the local government will collect the cash to pay their obligation within the same time period. - Used for all governmental fund types Accrual/Modified Accrual . Accrual - Recognize revenues when earned - Match expenses against the revenues . Modified Accrual - Recognize revenues when Measurable and Available (available to pay this year's bills - for ex. Revenue received wilhin 60 days of year-end) - Recognize expenditures when the obligation is incurred - no attempt to match revenues, match 10 period of occurrence only Fund vs. Government ide Statements . Government-wide statements use accrual basis and list long-term assets and liabilities for all fund types . Fund perspective statements use modified accrual for governmental type funds and omit long-term assets and long-term liabilities on government fund balance sheet 9 Why Budgets are Important . Net income is not a good measure of government effectiveness - Excess of revenues over expenditure does not mean success, but indicates whether the funds received are in excess of the funds expended - Since the funds received are often the result of transfer and other sources, tax revenues are not equivalent to sales as a measure of success in the marketplace . A budget is a financial plan submitted to the appropriate body for approval . Once approved, budgets carry the status of law - When voted upon, an appropriation act gives the legal authority to spend and generally sets the maximum limit for spending Importance of Budget Reporting . The primary means of government control is the budget - Financial statements should answer the question - Did the government use its funds as promised? - Budget amounts are incorporated in accounting records of the General Fund and special revenue funds to provide information that will keep spending within the legal limits. 10 Uses of Budgets . Governments must adopt an annual budget. . General funds and Special Revenue funds will have separate budgets. Separate budgets are optional for other funds. . Budgetary accounting principles are the same for any governmental type fund which adopts an annual budget. Putting Together the Budget . Plan the expected inflows - Project revenues based on past history, economic models, etc. . Plan the expected outflows - Ask departments forlheir projecl needs . Balance the inflows and the outflows - Look for places to increase revenues or to cut spending - Governments may also borrow or use accumulated surpluses to balance inflows and outflows Classification on Budget Schedule . Revenues are classified by source - Where the money came from: taxes, licenses and permits, charges for service, ete - May be subdivided further such as by type of tax, sometimes shown in separate schedule 11 Classification on Budget Schedule . Expenditures and Encumbrances may be classified by - Function, program, department, activity, character, or object . Function - General Government, Public Safety . Deparlmenl-FireDepartment . Activity - Drug Enforcement . Object-Salary . Character - Always: Current, Capital Outlay, Debt Service . The Government Finance Officer's Association of the United States and Canada (GFOA) has established a Budget Awards Program that recognizes exemplary budgeting practices. . Governments of all sizes should be able to provide citizens and other stakeholders with clear, understandable and complete budget documents. . This program is a practical method for continually improving the budget document . Evidence of sound financial management - Positive factor in credit ratings . Recognition for government and staff . Document meets well respected standards . Results in better, more informed document for elected officials and taxpayers 12 Budget . Four major categories - Policy Document - FinanCial Plan - Operations Guide - Communications Device Policy Document . Budget documents should contain: - Entity-wide long-term financial policies - Entity-wide, noh-financial goals and objectives that address long-term concerns and issues - Describe the entity's short-term initiatives that guide the development of the budget for the upcoming year - Clearly stated goals and objectives of organizations units (ex. Departments, divisions, or programs) Financial Plan . Budget documents should: - Include and describe all funds that are subject 10 appropriation - Present a summary of revenues, expenditures and other financing sources - Describe revenue sources, underlying assumptions for revenue estimates and discuss revenue trends - Include budgeted capital expenditures and the affect they will have on the current and future operating budgets 13 Financial Plan . The budget should include: - data on current debt obligations - describe the relationship between current debt levels and legal debt limits - explain the effects of existing debt levels on current operations Operations Guide . The budget document should: - Describe activities, services or functions carried out by organizational units - Provide objective measures of progress toward accomplishing the government's mission as well as goals and objectives for specific units and programs - Include an organization chart - Summary of personnel or position counts by department Communications Device . Budget documents should include items to help readers quickly understand major budgetary issues, trends, and resource choices. . Highlighting, indentation, bullet points. outlines, pictures, tables, or graphs help in communicating this information. 14 Communications Device . The budget should discuss - other planning processes that affecl Ihe budgel - long-term implica~ons of these other planning processes . The budget process and procedures for amending the budget explain to the reader - how the budget is developed - gIves them an understanding of the level of authority to approve changes - when there are opporlunilies for public inpul. Communications Device . Statistical and supplemental data is used to describe the organization, its community, an population. - This aids the readerfuser in understanding the decisions incorporated into the budget that will affect current or future levels of service. (ex. Population growth, economic strength, or a change in the size of school age population) Capital Budgets . Usually over 5-years . Large expensive projects . Equipment . Usually a separate process . Only current year of cost is included in the governmental units operating budget 15 Internal Controls . It is the duty of government financial managers to be good stewards of the resources committed to their care. Good stewardship requires that assets be properly: - Safeguarded - Managed - Accounted for . The purpose of internal controls is to meet these requirements Internal Control Structure . Control environment - Accounting systems and control procedures must be seen as essential by employees . Accounting system - Must be properly designed and maintained to meet the government's information needs . Control policies and procedures - Must be in place to ensure the integrity of data and to ensure that assets are protected Policies and Procedures . All transactions should be properly authorized . incompatible duties should be segregated . Accounting records and documentation should be properly designed and maintained . Access to both assets and records is controlled . Accounting data are compared with underlying items they represent periodically 16 . Clearly outlines the specific authority and responsibility . Foundation for employee accountability . Reference tool ("How To" manual) . Continuity in employee turnover Audit Committees . Audit Committees are comprised of members of the governing board. . In Arden Hills the City Council acts as the audit committee. . The Financial Planning and Advisory Committee is a citizen advisory board appointed by the council. - This provides public input 17