Fund Balances and Reserves- Do I Have Too Much?

Financial accountability, accuracy, and transparency are three pillars that government entities should strive to maintain. One way to do so is to establish and maintain adequate fund balances, which provides insight into a government’s financial health. When properly managed, this enables informed decision-making and strategic financial management.  

Key Takeaways 

• Establishing and maintaining adequate, but not excessive fund balances demonstrate appropriate stewardship of resources  and allows for strategic financial management. 
• GASB Statement No. 54 categorizes fund balances into five categories and outlines their importance in enhancing financial reporting and management. 
• By implementing strategic reserve policies and regularly evaluating fund balances, governments can mitigate financial risk and maintain financial integrity and compliance. 

Understanding Fund Balances   

Governmental Accounting Standards Board (GASB) Statement No. 54 emphasizes the importance of fund balance reporting and governmental fund types in government financial reporting. GASB defines a fund balance as “the difference between a government’s fund assets plus deferred outflows, and its liabilities plus deferred inflows,” which helps paint a clear financial picture of any available or hindered resources. These balances fit into five categories:  

• Nonspendable 
• Restricted 
• Committed 
• Assigned 
• Unassigned 

These categories help pinpoint how government resources are used, enhancing financial management and the allocation of resources processes.  

Although not a term that is used by the GASB literature, reserves are often employed by financial managers as an internal earmark and go hand in hand with fund balances, as they are often embedded within them. For instance, an organization might set aside money in a reserve for emergencies or for future capital to remain prepared in the event of an emergency or a negative economic shift. These reserves could be classified for external reporting (GASB) as either restricted, committed, or assigned fund balance depending on whether the source of the constraint was external to the government (i.e. a grant, voter proposition), or internal and the levels of internal authority. However, it’s important to note that fund balances should be policy-driven, meaning they are targeted and established to reduce risk and support proper financial planning. 

Benefits of Maintaining Fund Balances  

Government organizations that implement strategic reserve policies and fund balances will experience a wide range of benefits, including:  

• Increased financial stability 
• Enhanced transparency 
• Decreased financial risks  
• Improved citizen confidence 

These benefits directly correlate with a government’s financial success, making them a competitive advantage for maintaining financial integrity and compliance.  

In establishing a policy governing the level of fund balance, a government should consider a variety of factors, including: 

1. The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unrestricted fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile). 
2. Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, budget cuts). 
3. The potential drain upon general fund resources from other funds, as well as the availability of resources in other funds. 
4. The potential impact on the entity's bond ratings and the corresponding increased cost of borrowed funds. 
5. Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund balance to compensate for any portion of unrestricted fund balance already committed or assigned by the government for a specific purpose). Governments may deem it appropriate to exclude from consideration of fund balance adequacy levels those resources that have been committed or assigned to some other purpose and focus on unassigned fund balance, rather than on unrestricted fund balance. 
6. Needs of the government and its constituency. Excess fund balance could be counterproductive and should be avoided, as those resources may need to be deployed for carrying out the government’s goods and services to its constituents, or even future revenue reductions.   

Best Practices for Evaluating Fund Balances  

As the economic landscape shifts and regulatory compliance evolves, governments should evaluate their finances and financials goals to properly assess the appropriate levels of criteria for fund balances and reserves.  

1. Following GASB standards increases transparency, reporting accuracy, and compliance.  
2. Establishing formal reserve and minimum fund balance policies helps pinpoint target levels and strategies to promote consistency and accountability. These policies should be reviewed regularly to keep up with evolving standards, market conditions, and organizational goals.  
3. Conducting risk assessments allows entities to understand their exposure to various risks, enhancing decision-making and financial planning.  
4. Communicating with citizens enhances trust and confidence.  

Enhanced Support for Strategic Financial Management  

Governments seeking greater oversight and support for their fund balances and reserves often benefit from engaging a trusted third party. Accounting and advisory firms, such as EisnerAmper, bring deep knowledge of government financial planning. With a strong understanding of GASB standards, compliance, and state and local governments, our team provides you with tools, resources, and guidance to advance your financial strategy. For more information on how the EisnerAmper team can help, please contact us.