1. Michigan Association of Municipal Clerks Basics of Governmental Accounting/Budgeting Presented By:Chrystal Simpson, CPA June 16, 2016

2. 1 Introduction to Governmental Fund Accounting  Definition  A fund is defined as an independent fiscal and accounting entity with a self-balancing set of accounts recording cash and/or other resources together with all related liabilities, obligations, reserves and equities that are segregated for the purpose of carrying on specific activities or attaining certain objectives in accordance with specific regulations, restrictions or limitations.

3. 2 Introduction to Governmental Fund Accounting  Comment  While a private business enterprise can be viewed as a single economic entity with one group of assets, liabilities and equity accounts that are normally reflected in a single set of financial statements, a governmental unit normally has several entities or funds, each of which has its own assets, liabilities and fund equities. (Continued on the next page)

4. 3 Introduction to Governmental Fund Accounting  Comment  A governmental unit is a combination of several distinctly different operations, each of which functions, and must be reported on, independently from any other fund.

5. 4 Types of Funds Governmental Funds  General fund  Special revenue funds  Debt service funds  Capital project funds  Permanent funds Proprietary Funds  Enterprise funds  Internal service funds Fiduciary Funds  Trust funds (Pension and other employee benefit, Investment, Private purpose)  Agency funds (Continued on the next page)

6. 5 Types of Funds  I.General Fund  The General Fund accounts for all revenue and expenditures that are not accounted for elsewhere and is usually the operating fund of a governmental entity. (Continued on the next page)

7. 6 Types of Funds  II.Special Revenue Funds  Special Revenue Funds are used to account for the proceeds of earmarked revenue or financing activities requiring separate accounting because of legal or regulatory provisions. In many cases, the use of the separate fund is mandatory. (Continued on the next page)

8. 7 Types of Funds  III.Debt Service Funds  Debt Service Funds are used to account for the annual payment of principal, interest and expenses in connection with certain long-term debt other than debt payable from the operations of an Enterprise Fund. In many cases, the use of Debt Service Funds is optional. (Continued on the next page)

9. 8 Types of Funds  IV.Capital Projects Funds  Capital Projects Funds are used to account for the development of capital facilities other than those financed by special assessments or the operations of an Enterprise Fund. In many cases, the use of Capital Projects Funds is optional. (Continued on the next page)

10. 9 Types of Funds V.Permanent Funds  Permanent Funds are used to account for resources that are permanently restricted – such as a cemetery perpetual care fund. (Continued on the next page)

11. 10 Types of Funds  VI.Enterprise Funds  Enterprise Funds are used to account for activities that provide a good or service to citizens that is financed primarily by a user charge for the provision of that good or service. (Continued on the next page)

12. 11 Types of Funds  VII.Internal Service Funds  Internal Service Funds are set up to account for goods and services provided by designated departments on a fee basis to other departments and agencies within a single governmental unit. (Continued on the next page)

13. 12 Types of Funds  VIII. Fiduciary funds 6 Fiduciary funds include only those activities where the government acts as a trustee or agent for organizations outside the government. 6 Fiduciary funds should not be used to hold assets that may be used to support this government’s programs (Continued on the next page)

14. 13 Types of Funds Fiduciary Funds include:  Pension and other employee benefit trust funds  Investment trust funds  Private purpose trust funds  Agency funds (Continued on the next page)

15. 14 Basis of Accounting There are two basic methods of accounting for funds: + Full-accrual basis; and + Modified accrual basis (Continued on the next page)

16. 15 Basis of Accounting Full-accrual Basis ! Under a full-accrual basis, revenue is recorded in the accounts at the time it is earned and expenditures are recorded when the liability for them is initially incurred. (Continued on the next page)

17. 16 Basis of Accounting Full-accrual Basis ! The accrual basis, to the extent it is practicable, provides a superior method of accounting for the inflow and outgo of economic resources in any organization because it relates the costs and expenditures to the time period in which benefits of the outlays are received and because it provides a more accurate matching of these benefits with any associated revenue. (Continued on the next page)

18. 17 Basis of Accounting (Continued on the next page) Modified-accrual Basis + Under a modified-accrual basis of accounting, expenditures are recorded on an accrual basis except that: 1. Land, buildings and equipment items are expensed when purchased.

19. 18 Basis of Accounting (Continued on the next page) Modified-accrual Basis 2. Inventory items may be considered expenditures at the time of purchase or when used 3. Interest on long-term debt is expensed when due 4. Prepaid expenses are normally expensed when incurred.

20. 19 Basis of Accounting (Continued on the next page) Modified accrual basis:  Revenue is recorded when earned, subject to its ability to be measured or estimated accurately and its availability to finance expenditures of the period. This generally means that revenue is accrued if received within 30 to 60 days from year-end.

21. 20 Basis of Accounting 6 Full-accrual Basis  Enterprise Funds  Internal Service Funds  Fiduciary Funds Listed below are the bases of accounting for the various funds: (Continued on the next page)

22. 21 Basis of Accounting 6 Modified-accrual Basis  General Fund  Special Revenue Funds  Debt Service Funds  Capital Outlay Funds  Permanent Funds (Continued on the next page)

23. Budget Concept  Definition  A budget is a plan of financial operations embodying an estimate of proposed expenditures for a given period of time and the proposed means of financing them. In the State of Michigan, all General and Special Revenue Funds are required by law to be budgeted annually. 22

24. Budget Concept Budget Mission  The mission of the budget process is to help decision makers make informed choices about the provision of services and capital assets and to promote stakeholder participation in the process. 23

25. Budget Concept Good Budgeting  A Good budget process is characterized by several essential features. A good budget process:  Incorporates a long-term perspective,  Establishes linkages to broad organizational goals,  Focuses budget decisions on results and outcomes,  Involves and promotes effective communication with stakeholders, and  Provides incentives to government management and employees. 24

26. Budget Concept Budget Process  The annual budgetary process involves the following three phrases: A.Preparation B.Adoption C.Execution 25

27. Budget Concept A. Preparation The preparation phase is usually the responsibility of the chief financial executive of the municipality. It is accomplished by analyzing the financial data and projecting the program requirements of the various functions and activities for which a particular government may have responsibility. 26

28. Budget Concept B.Adoption Once the budget has been prepared, it is presented to the governmental unit’s legislative body for consideration, possible modification and final approval. Typically, the public is invited to participate in this phase via public hearings on proposed budgets. 27

29. Budget Concept C. Execution Budgetary accounts are set up to record the estimated revenue and appropriations in the fund accounts. As economic conditions change, budgetamounts can be amended by a process determined by the governmental unit’s legislative body. 28

30. Overview of the Budgeting Process  Legal Requirements for a Budget  P.A. 621 of 1978 requires a budget appropriation to be in place before a governmental unit may commit to spending money.  Budget vs. General Appropriations Act  Funds required to have a General Appropriations Act  Required budget calendar  Required data to be included in the budget 29

31. Overview of the Budgeting Process  Types of Budget  Line item  Cost center (department, activity, program or function)  Fund total 30

32. Overview of the Budgeting Process  Accounting Basis Used in the Budget  Cash basis  Modified accrual basis  Full accrual basis  Other comprehensive basis (e.g., excluding installment purchase debt, encumbrance basis, etc.) 31

33. Budget Requirements Must include prior year actual, current year estimates and proposed budget Must include fund balance, projected to the end of the budget year; this amount must be positive (the definition of a “balanced budget”) 32

34. Budget Requirements Observation: This is the appropriate time for the governing body to debate and agree upon a target fund balance Must include the General Fund and any Special Revenue Funds 33

35. Municipal Budget Summary of Requirements  1. Has a budget been adopted (General Fund, Special Revenue Funds)? 62.Was a public hearing held on the budget? 63.Was all the necessary information in the budget document for the budgetary funds: + Actual prior year (both revenue and expenditures)? + Estimate of current year (both revenue and expenditures)? + Proposed budget (both revenue and expenditures)? 34

36. Municipal Budget Summary of Requirements + Amounts for contingencies if appropriate? + Amount of fund balance (deficit) accumulated + Amount of fund balance (deficit) accumulated from prior years and the estimated surplus or deficit expected in the current year?  4.Is the budget balanced (including fund balance or deficit)?  5.Has the budget been amended when necessary if actual revenue is less than the budget estimated? 35

37. Municipal Budget Summary of Requirements 6. Has the budget been amended to allow expenditures in excess of the original appropriation? 7.Is the new debt entered into, if applicable, permitted by law? 8.Are expenditures equal to or less than amounts appropriated? 9.Are all expenditures authorized in the budget? NOTE: In order to be in compliance with the Budget Act, all questions should be answered “Yes.” 36

38. Budget Preparation  The Accounting/Budgeting partnership: + Organizing line items into costs centers should be done in conjunction with the accounting general ledger.  Chart of Accounts is generally organized by either department head responsibility, or by the function/activity. See following examples of how this makes a difference in both the budget and the general ledger. 37

39. Budget Execution/Monitoring What Kind of Data can be Reported?  Balance sheet Revenue vs. budget Expenditures vs. budget Special items 38

40. Budget Execution/Monitoring What Kind of Data can be Reported?  Special items 6 Good news 6 Bad news 6 Actions needed 6 Actions taken 6 Unexpected items 39

41. Budget Execution/Monitoring How can we Structure the Report?  Executive summary General fund details Other fund summaries Department details 40

42. Budget Execution/Monitoring How can we Structure the Report?  Executive summary 6 Revenue/Expenditures vs. budget 6Annual budget 6Prorated budget 6Percentage comparison 6Incremental budget 6 Highly summarized narrative (items of interest could be explained directly on Revenue/Expenditures vs. budget page) 41

43. Budget Execution/Monitoring 42 City of Somewhere General Fund Six Months ended sometime

44. Budget Execution/Monitoring 43 City of Somewhere General Fund Six Months ended sometime

45. Budget Execution/Monitoring 44 City of Somewhere General Fund Six Months ended sometime

46. Budget Execution/Monitoring 45 City of Somewhere General Fund Six Months ended sometime

47. Fund Balance 46 RULE OF THUMB 6A commonly recited rule of thumb is that fund balances should equal at least 10 percent of annual budgeted expenditures. SPECIAL CONSIDERATIONS 6The appropriate amount of fund balance should be determined with consideration to any special plans, needs or situations, such as:

48. Fund Balance 47 SPECIAL CONSIDERATIONS (Continued) 6Planned Capital Assets Acquisitions 6 Accumulation of Compensated Absences 6 Contingent Liabilities 6Lawsuits 6Environmental cleanup 6Michigan Tax Tribunal

49. Fund Balance 48 SPECIAL CONSIDERATIONS (Continued) 6 Nonliquid Assets 6Inventory 6Prepaid expenses 6 Potential Revenue Reductions 6Legally Reserved or Segregated Funds 6Advance or unspent earmarked tax collections or other receipts 6Grants or contributions 6 Working Capital Needs Based on Expense Patterns

50. Fund Balance 49 DIFFERING YEAR-ENDS 6Consideration should be given to the municipality's fiscal year in relation to its tax collection period (and by default, to the time remaining until the next "payday") - See the illustrations that follow. DEFICITS 6State statutes require local units to adopt and file a deficit elimination plan in the event any governmental fund has a fund balance deficit.

51. Fund Balance 50 FUND BALANCE ANALYSIS Example: General Fund Revenue: – Property taxes$ 600,000 – State revenue sharing 360,000 – Other 240,000 Total$ 1,200,000 Expenditures $ 1,200,000

52. Fund Balance 51 July Tax Collection Minimum Fund Balance $120,000 $300,000 $450,000

53. Fund Balance 52 December Tax Collection Minimum Fund Balance $120,000 $300,000 $450,000

54. Financial Model  1. Why Prepare a Three Or Five-year Financial Model? + Flexible tool to analyze impact of changing environment + Decision-making tool (additional information following) + Prepare for the future (additional information following) + Provides a benchmark to measure results + Promotes a philosophy of action rather than reaction 53

55. Financial Model Decision-making tool 6Focuses greater attention on the future implications of today’s decisions 6Useful tool for ongoing planning, budgeting and visioning efforts 6Analyze impact of various options 6Use plan to develop strategies and objectives for the municipality 54

56. Financial Model  Prepare for the future 6Provides an early warning system for identifying and avoiding threats 6Identify and prepare for future decisions 6Identify and capitalize on opportunities 55

57. Financial Model  2. Preparing The Model + Level of sophistication + Funds to include + Obtain information (additional information following) + Prepare the plan (additional information following) + Prepare an executive summary (additional information following) 56

58. Financial Model  Obtain Information 6Understand the community’s strengths and challenges 6Series of interviews with relevant staff to: 6Determine operating, staffing and capital needs 6Development realistic assumptions for projection 6Available financial and statistical data 57

59. Financial Model  Prepare the plan 6Model should be flexible 6Estimates based on a combination of both actual historical experience and next year’s budget 6Estimate revenue by source 6Project operating expenditures for each major functional area 6Estimate required capital costs and infrastructure needs 6Identify other significant costs which may be incurred by the municipality 58

60. Financial Model  Prepare an executive summary 6Summary of significant assumptions 6Summary of results 59

61. Financial Model 3. Using The Model 6Identify areas of concern/priorities 6Determine strategies, objectives and action plan (additional information following) 6Monitor results on a routine basis to modify strategies as necessary to adapt to unanticipated changes 6Preparing “what if” scenarios 6Periodically update model 60

62. Financial Model  Determine strategies, objectives and action plan 6Identify desired fund balance level 6Develop strategies to reduce cost or improve cost effectiveness 6Develop revenue enhancement strategies 6Develop strategies to allocate resources 61

63. Financial Model  Revenue:  Information for state shared revenue distribution: State Department of Treasury Website: www.michigan.gov/treasury 62

64. Financial Model  Information for Act 51 distribution:  Per Capita Distribution Rates (from the state)  Number of Miles – Major, Local and Trunkline 63

65. Financial Model  Information for property taxes:  Taxable value and millage rates for the current fiscal year  Projected real growth in State Equalized Value  Projected growth in net additions (net of losses) for real and personal property  Projected real property turnover rate 64

66. Financial Model  Sample Model-List of Items Required  Expenditures:  Summary of all union contracts and expiration dates:  Scheduled wage increases  “Across the board” increases  “Step” increases 65

67. Financial Model  Detail of wages/personnel for each department:  Number of employees for each labor category (elected official, union, non-union, etc.) by department  Average salary and average benefits for each labor category  Average overtime level by labor category and by department  Projected capital outlay  Projected debt service requirements 66

68. Chrystal Simpson, CPA mailto:Chrystal.Simpson@plantemoran.com mailto:Chrystal.Simpson@plantemoran.com 810-766-6055 Contact Information: Amar Rushing, CPA mailto:Amar.Rushing@plantemoran.com 810-766-6034