Fund Balance

How It Works

Fund balance is the difference between a fund's assets and liabilities, and it is the closest municipal equivalent to retained earnings on a corporate balance sheet. Under GASB Statement 54, issued in 2009 and effective for fiscal years beginning after June 15, 2010, general fund balance is classified into five hierarchical categories: nonspendable (inventories, prepaids), restricted (externally constrained by creditors, grantors, or law), committed (set aside by formal council action), assigned (intended for specific purposes), and unassigned (the residual available for any purpose). The Government Finance Officers Association (GFOA) recommends cities maintain unrestricted general fund balance (committed + assigned + unassigned) of at least two months of operating expenditures, or roughly 16.7% of annual expenditures, as a minimum. Cities with fund balances below this threshold are vulnerable to economic shocks and face credit rating downgrades from Moody's (Aaa to C scale) and S&P. During the 2008-2010 Great Recession, many cities depleted reserves built over the prior decade, taking five to seven years to rebuild. Detroit's fund balance was chronically negative in the years preceding its July 2013 bankruptcy. Fund balance as a percentage of expenditures is the primary input to the 25% budget balance and reserves weighting in the CitySpend Fiscal Health Score.

Related Terms

• General Fund, The primary operating fund for a city government, covering most day-to-day services like police, fire, parks, and administration.
• Rainy Day Fund, A reserve fund set aside specifically for emergencies, revenue shortfalls, or unexpected expenses, separate from the general fund balance.
• Structural Deficit, A persistent gap where a city's recurring expenses exceed its recurring revenue, meaning the budget is fundamentally unbalanced even in a normal economy.