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11-066 - O Pt A� PR! S PER TOWN OF ORDINANCE NO. 11-66 AN ORDINANCE OF THE TOWN OF PROSPER, TEXAS ADOPTING A FUND BALANCE POLICY; AUTHORIZING THE TOWN MANAGER TO ASSIGN FUND BALANCE FOR INTENDED SPECIFIC USES; PROVIDING FOR REPEALING, SAVINGS AND SEVERABILITY CLAUSES; PROVIDING FOR AN EFFECTIVE DATE OF THIS ORDINANCE;AND PROVIDING FOR THE PUBLICATION OF THE CAPTION HEREOF. WHEREAS, the Governmental Accounting Standards Board (GASB) released Statement No. 54 — "Fund Balance Reporting and Governmental Fund Type Definitions" on March 11, 2009, effective for the fiscal year ending on September 30, 2011; and WHEREAS, as part of GASB Statement No. 54, governments are required to adopt and disclose information in the notes to the financial statements about amounts reported in fund balance.; and WHEREAS, this new Statement is intended to improve the usefulness of the amounts reported in fund balance by providing more structured and consistent classifications; and WHEREAS, the Town Council and Town Staff have long held informal policies regarding fund balance and unreserved fund balance targets,which this policy will serve to solidify. NOW THEREFORE, BE IT ORDAINED BY THE TOWN COUNCIL OF THE TOWN OF PROSPER, TEXAS, COLLIN COUNTY,TEXAS: SECTION 1: Findings Incorporated. The findings set forth above are incorporated into the body of this Ordinance as if fully set forth herein. SECTION 2: Adoption of Fund Balance Policy Budget. We the Mayor and Town Council for the Town of Prosper do hereby approve and adopt the attached (Exhibit "A") Fund Balance Policy for the Town of Prosper. SECTION 3: Authority of Town Manager. Specific authority is hereby given to the Town Manager to assign fund balance amounts to a specific purpose as further described in the Fund Balance Policy. The Town Manager may also delegate this authority to a committee or staff member as he or she may deem appropriate. SECTION 4: Savings/Repealing Clause. All provisions of any ordinance in conflict with this Ordinance are hereby repealed; but such repeal shall not abate any pending prosecution for violation of the repealed Ordinance, nor shall the repeal prevent prosecution from being commenced for any violation if occurring prior to the repeal of the Ordinance. Any remaining portions of conflicting ordinances shall remain in full force and effect. SECTION 5: Severabilitv. Should any section, subsection, sentence, clause or phrase of this Page 1 of 2 Ordinance be declared unconstitutional or invalid by a court of competent jurisdiction, it is expressly provided that any and all remaining portions of this Ordinance shall remain in full force and effect. Prosper hereby declares that it would have passed this Ordinance, and each section, subsection, sentence, clause, or phrase thereof irrespective of the fact that any one or more sections, subsections, sentences, clauses,or phrases be declared unconstitutional or invalid. SECTION 6: Effective Date.This Ordinance shall become effective upon its formal adoption. DULY PASSED AND APPROVED BY THE TOWN COUNCIL OF THE TOWN OF PROSPER, TEXAS ON THIS 27`h DAY OF SEPTEMBER, 2011 AT A MEETING WHICH WAS HELD IN STRICT ACCORDANCE WITH THE TEXAS OPEN MEETING A T. n _ K"L- RAY SMIT�,Mayor ATTEST TO: AMY PIUKANA,/RMC' Town Secretary Date of Publication �� ' �— Prosper Press Page 2 of 2 TOWN OF PROSPER FUND BALANCE POLICY oOM'�'AURHN /boo Purpose and Overview LLJJ L� The purpose of this policy is to establish guidelines for fund balance levels within each of Town of Prosper's funds. It is essential that the Town maintain adequate levels of fund balance to mitigate financial risk that can occur from unforeseen revenue fluctuations, unanticipated expenditures, or adverse circumstances. The fund balance level is also designed to provide sufficient capital for the Town's general operations. The Town of Prosper avoids appropriating fund balance for recurring expenses. However, in the event that fund balance is used to support recurring expenses, the budget will clearly identify the uses of fund balance and provide an explanation of the circumstances requiring the use of fund balance. In addition, the budget will also address the future potential uses of fund balance for operating expenditures and a course of action to replenish fund balances to target levels. This policy ensures the Town maintains adequate fund balances in various operating funds for capacity to: 1. Provide sufficient cash flow for daily financial needs, 2. Secure and maintain investment grade bond ratings, 3. Offset significant economic downturns or revenue shortfalls, and 4. Provide funds for unforeseen expenditures related to emergencies. Definitions and Categories Fund Balance — Defined as the difference between a fund's assets and liabilities reported in a governmental fund, which is more a measure of liquidity than of net worth. This would be most similar to lvorking capital as used in the private sector. According to the Governmental Accounting Standards Board (GASB) statement number 54, fund balance must be allocated into one the following five categories: 1. Nonspendable Fund Balance — includes amounts that either (a) are not in a spendable form or (b) are legally or contractually required to be maintained intact. Examples include prepaid items, inventory, redevelopment properties held for resale, or endowments. 2. Restricted Fund Balance — includes amounts for which constraints have been placed on the use of the resources either (a) externally imposed by creditors (such as through a debt covenant), grantors, contributors, or laws or regulations of other governments, or (b) imposed by law through constitutional provisions or enabling legislation, or (c) imposed by Town Charter. Examples include Contingency Appropriations in the Town Charter, grants and debt covenants. 3. Committed Fund Balance — includes amounts that can be used only for the specific purposes determined by a formal action of the government's highest level of decision-making authority. Commitments may be changed or lifted only by the government taking the same formal action that imposed the constraint originally. Examples include any Council-imposed use or limitation set by Town Ordinance or Resolution. 4. Assigned Fund Balance — includes amounts intended to be used by the government for specific purposes. In governmental funds other than the general fund, assigned fund balance represents the amount that is not restricted or committed. This indicates that resources in other governmental funds are, at a minimum, intended to be used for the purpose of that fund. 5. Unassigned Fund Balance — is the residual classification of the general fund and includes all amounts not contained in the other classifications. Unassigned amounts are technically available for any purpose. Note: The above fiend balance categories only apply to governmental funds. FUND BALANCE POLICY (Continued) Fund Balance Policy Restricted Fund Balance While the Fund Balance Policy is intended to focus more on unrestricted portions of fund balance, it is important to note a Town Charter provision in Section 7.08 as amended in May 2011 that imposes a legal restriction on a Contingent Reserve of the General Fund. It reads, "Provision shall be made in the annual budget maintaining a contingency reserve fund balance designation in an amount not less than twenty percent (20%) of the total general fund expenditures, to be used in case of unforeseen items of expenditure or revenue shortfalls. This shall apply to current operating expenses and shall not overlap with any other amount of reserves maintained by the Town. Such contingency reserve appropriation shall be under the control of the Town Manager and distributed by him or her only in the event of an emergency or after supplemental appropriation by the Town Council. The proceeds of the contingency reserves shall be disbursed only by transfer to departmental appropriation, the spending of which shall be charged to the departments or activities for which the appropriations are made." Committed Fund Balance The Town Council is the Town's highest level of decision-making authority and the formal action that is required to be taken to establish, modify, or rescind a fund balance commitment is an ordinance or resolution adopted by the Town Council. The formal action must either adopt or rescind the commitment, as applicable, prior to the last day of the fiscal year for which the commitment is made. The amount subject to the constraint may be determined in the subsequent period. Assigned Fund Balance The Town Council authorizes the Town Manager or his/her designee as the official authorized person to assign fund balance to a specific purpose approved by this fund balance policy. Order of Expenditure of Fund Balance When multiple categories of fund balance are available for expenditure (for example, a construction project is being funded partly by a grant, funds set aside by the Town Council, and unassigned fund balance), the Town will start with the most restricted category and spend those funds first before moving down to the next category with available funds. Normally this would result in the use of restricted, then committed, then assigned, and lastly, unassigned fund balance. The Town reserves the right to selectively spend unassigned resources first to defer the use of these other classified funds if determined to be in the Town's best interest. Minimum Unassigned Fund Balance It is the goal of the Town to achieve and maintain an unassigned fund balance in the general fund equal to twenty-five percent (25%) of budgeted expenditures for unanticipated expenditures, unforeseen revenue fluctuations, or other adverse circumstances. The unassigned fund balance level, however, may be reduced to the equivalent of ten percent (10%) of budgeted expenditures in unusual financial circumstances. However, if such a situation occurs, the Town will implement necessary corrective action within a five-year plan to restore the unassigned fund balance to the equivalent of twenty-five percent (25%) of budgeted expenditures. FUND BALANCE POLICY (Continued) "MrAn'IMM N' Non-governmental find balances The fund balance categories discussed above do not apply to proprietary funds according to GASB 54. While not required by the GASB, the Town recognizes the need to apply a minimum balance policy to the proprietary funds maintained by the Town. Therefore, the Town shall strive to maintain a minimum ending working capital balance (current assets minus current liabilities) of at least twenty-five percent (25%) of budgeted non-capital expenditures for each of the proprietary funds. If the working capital level should fall below the desired minimum, the Town will implement necessary corrective action within a five-year plan to restore the working capital balance to twenty-five percent (25%) of budgeted non-capital expenditures.