Town Council Adopts Fund Balance Policy

On February 14, the Charlestown Town Council adopted, on a 3 to 2 vote, the Fund Balance Policy that was recommended by the Charlestown Budget Commission. Town Councilors Cody Clarkin, Susan Cooper, and Bonnie Van Slyke voted in favor of this policy that is based on the impartial study from the highly respected Government Finance Officers Association (GFOA).

The Fund Balance Policy will help Charlestown maintain financial stability over time and also will provide a capacity to recover from a major hurricane or other disasters. Charlestown is the first Rhode Island town to formally adopt a formal fund balance policy

A different fund balance policy, written by a private citizen and proposed by Councilor Deborah Carney, did not receive support because it would have resulted in unstable and unpredictable tax rates and would not have adequately protected against risk.

---

Town of Charlestown Fund Balance Policy (adopted 2/14/2022)

The purpose of this policy is to establish the recommended level of unassigned fund balance that is to be maintained in the General Fund for generally accepted accounting principles (GAAP) and budgetary requirements of the Town.

It is essential that Charlestown maintain adequate levels of fund balance to mitigate current and future risks (e.g., revenue shortfalls and unanticipated expenditures) and to ensure stability for Town services and tax rates. In most cases. discussions of fund balance will focus on the Town’s general fund. The Town shall also consider financial resources available in other funds in assessing the adequacy of unassigned fund balance in the general fund.

In order to comply with the Governmental Accounting Standards Board (GASB) standards and ensure accurate and transparent reporting of the governmental funds received and expended, the Town will adhere to the following:

Classification of revenue: The revenue streams in all governmental funds will be reviewed and appropriately classified and reported in the financial statements as determined by and in accordance with the government accounting standards board (GASB) definitions.

Order of expenditure of funds by classification: Expenditures may be incurred for purposes for which both restricted and unrestricted (committed, assigned, or unassigned) amounts are available. Composition of the ending fund balance will be determined by applying the following: In those instances where both restricted and unrestricted amounts are available, restricted amounts will be considered to have been spent first [as allowed and in compliance with stated and specified terms or requirements], followed by committed amounts, followed by assigned amounts, and then unassigned amounts.

Classification of fund balance amounts: The fund balance amounts in all governmental funds will be reviewed and appropriately classified and reported in the financial statements in accordance with the definitions described in the GFOA report, dated May 2021.

The following outlines the conditions warranting use and replenishment of the fund balance and the amounts to be held in reserve.

Target Levels of Fund Balance:
An adequate level of unassigned fund balance is essential to mitigate current and future risks and to ensure service levels.

The Town will strive to maintain an unassigned fund balance in an amount equal to 23% and 33% of its annual operating expenditures and a cumulative probability of adequacy of 90+%.

The fund balance target is expressed as a range, recognizing that fund balance levels can fluctuate from year to year in the normal course of operations for any local government. The Town shall periodically revisit this range from a risk-based perspective with consideration of the existing economic and environmental conditions. Specifically, amounts are and will be held in unassigned fund balance for:

• Economic uncertainty (i.e., to cushion the Town against fluctuations in revenues and costs due to economic conditions),
• Extreme events (i.e., allows the Town to respond quickly and decisively to events such as natural disasters, catastrophic accidents, unexpected infrastructure repair/replacement, etc.),
• Working capital (i.e., to cushion the Town against revenue shortfalls or expenditure fluctuations associated with routine Town business e.g., property tax revenues are received quarterly, but the Town delivers all services year-round.)

It is anticipated that this is a level sufficient to provide for the required resources to ensure short-term cash availability when revenue is unavailable or unanticipated expenditures (including emergencies) occur.

If, based on the Treasurer’s analysis and forecasting, the target balance is not being met or is likely to not be met at some point within a three-year time horizon, then the Town Administrator will develop a plan to meet the target balance. This plan will then be presented to the Budget Commission for consideration during the annual budget process. The Budget Commission will then forward a plan to the Town Council for review and/or adoption.

Use of Unassigned Fund Balance:
Should annual audited general fund revenues exceed expenditures and encumbrances, a year-end operation surplus shall be reported. Any portion of the year-end operating surplus that contributes to the general fund unassigned fund balance in excess of the minimum of the target range will be deemed available for allocation to:

• Replenish any other established assigned, committed, or restricted funds
• Transfer to capital project funds for the capital improvement program and/or deferred maintenance needs.
• Offset one-time shortfalls anticipated in the general fund operating budget.

The use of unassigned fund balance in excess of target levels shall not normally be applied to recurring annual operating expenditures. Reserves may, however, be used to allow time for the Town to restructure its operations in a deliberate manner, but such use will only take place in the context of a long-term plan.

Replenishment of Unassigned Fund Balance:
Should annual audited general fund expenditures and encumbrances exceed revenues, a year-end operation deficit shall be reported. Generally, the Town will seek to replenish the unassigned fund balance within one to three years of use. Specifically, factors influencing the replenishment time horizon include:

1. The budgetary reasons behind the fund balance targets;
2. Recovering from an extreme event;
3. Political continuity;
4. Financial planning time horizons;
5. Long-term forecasts and economic conditions;
6. External financing expectations.

Revenue sources that would typically be looked to for replenishment of a fund balance include nonrecurring revenues, budget surpluses, and excess resources in other funds (if legally permissible and there is a defensible rationale). Year-end surpluses are an appropriate source for replenishing fund balance.

Authority for Use and Replenishment of Reserves:
The Town Treasurer shall provide the Budget Commission with a report of the prior year audited unassigned fund balance along with a projection of the current year unassigned fund balance based on the annual budget operations.

In the event the unassigned fund balance falls outside the Town’s target range (equal to 23% and 33% of its current annual operating expenditures), the Budget Commission shall plan for the use and/or replenishment in the budget recommendation to the Town Council.