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City of Centerville March 28, 2012 Page 4 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’s financial statements for the year ended December 31, 2011. 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 $73,910 from 2010. The fund balance of $1,142,321 is 55 percent of the 2012 budgeted expenditures. The total General fund budget is $2,054,700 for 2011. 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. Council adopted a fund balance resolution and the City is in compliance with this resolution. The Office of the State Auditor (the OSA) has issued a Statement of Position relating 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 purposes and benefits of an adequate fund balance are as follows: Expenditures are incurred somewhat evenly throughout the year. However, property tax and state aid revenues are not received until the second half of the 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 continually adjusts the local government aid and property tax credit formulas. We also have seen the State mandate levy limits for cities over 2,500 in population. 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 in future bond sales.