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City of Centerville May 19, 2010 Page 8 Other Matters The following are areas that came to our attention during the audit that we feel should be reviewed: Financial Position and Results of Operations Our principal observations and recommendations are summarized on the following pages.These recommendations resulted from our observations made in connection with our audit of the City’sfinancial statements for the year ended December 31, 2009. General Fund The General fund is used to account for resources traditionally associated with government, which are not required legally or by sound principal management to be accounted for in another fund.The General fund balance increased $73,810from 2008. The fund balance of $1,231,326 is57percent of the 2010budgeted expenditures.The total General fund budget is $2,159,594for 2010.We recommend the fund balance be maintained at a level sufficient to fund operations until the major revenue sources are received in June.We feel a reserve of approximately 40 to 50 percent of planned expenditures and transfers out is adequate to meet working capital and small emergency needs.At the current level, the fund balance is above the minimum but Council has acknowledged the amount. Statement of Position The Office of the State Auditor (the OSA) has issued arelating to fund balance stating “a local government should identify fund balance separately between reserved and unreserved fund balance. The local government may assign and report some or all of the fund balance as designated and undesignated.” We recommend local governments adopt a formal policy on the level of unreserved fund balance that should be maintained in the general and special revenue funds. This helps address citizen concerns as to the use of fund balance and tax levels.The City adopted a fund balance policy during 2009. Purposes and Benefits of an Adequate Fund Balance. Expenditures are incurred somewhat evenly throughout the year.However, property tax and state aid revenues are not received until the second half ofthe year.An adequate fund balance will provide the cash flow required to finance the governmental fund expenditures. The City is vulnerable to legislative actions at the State and Federal level.The State imposed reductions of market value credit aid and local government aid for some cities for 2009 and 2010.The Governor has recently presented increased reductions of 2010 funding as well as reductions of 2011 funding.Levy limits have also been implemented for municipalities in past legislative sessions.An adequate fund balance will provide a temporary buffer against those aid adjustments and levy limits. Expenditures not anticipated at the time the annual budget was adopted may need immediate Council action.These would include capital outlay replacement, lawsuits and other items.An adequate fund balance will provide the financing needed for such expenditures. A strong fund balance will assist the City in obtaining, maintaining or improving its bond rating.The result will be better interest rates infuture bond sales.