Finance

A reserve fund is a separate, dedicated financial account that is created to fund a specific municipal purpose whose balance is carried over from year to year. Reserve funds are created by approval from a majority of voters at an annual or special town meeting. 24 V.S.A. § 2804. A reserve fund can be created for any legitimate municipal purpose. Once created, it falls under the control and direction of the selectboard. 

Approval of this fund requires a majority vote regarding the purpose and amount of money to be set aside to create this fund. Once created, the selectboard has the authority to spend the money only for the special purpose for which the fund was created. The money set aside for this fund and any monies accruing from investing it are used for the original purpose of the reserve fund. If it is determined that the money allocated to a reserve fund would best serve an alternative purpose, this money can be so designated at an annual or special town meeting where the majority of voters approve of this reallocation. 

The reason for creating a reserve fund is twofold. First, it ensures that money appropriated by the voters will only be used for the stated purpose of the reserve fund. Once created, the funds can be disbursed by the selectboard without further voter approval. Second, a reserve fund allows the selectboard to roll over money that is placed in the fund and not spent from year to year.  

The bottom line is that a reserve fund does not exist unless the voters have approved it at an annual or special town meeting. In fact, under Vermont law reserve funds only cease to exist if the voters vote to rescind the fund. Accordingly, if you are not sure if you have a bona fide reserve fund, check the town or special meeting minutes to see if a record of the voters creating the fund exists. If no such record exists, neither does the fund. 

Reserve Funds. Twenty-four V.S.A. § 2804 allows municipalities to establish a reserve fund under the control and direction of the selectboard. Money in the reserve fund can be expended by the selectboard for such purposes for which the reserve fund was established or for other purposes when authorized by a majority of the voters at an annual or special meeting. Creation of a reserve fund requires voter approval of warned articles similar to these: 

Shall the voters establish a reserve fund to be called the [insert name of reserve fund] to be used for [insert purpose of reserve fund], in accordance with 24 V.S.A. § 2804? 

Shall the town [insert funding mechanism such as “raise and appropriate the sum of $X,” or “deposit $X from the general fund surplus”] to fund the [insert name] reserve fund? 

Note: If the town votes from the floor, the creation of the reserve fund and the funding of the reserve fund may be accomplished in two separate articles. However, if the town votes by Australian ballot, the creation and funding of the reserve fund must be combined into one article. Regardless of the voting method, any funding mechanism that is approved by the voters is only in effect for the ensuing year. 

A reserve fund policy can assist the selectboard in administering such a reserve fund by guiding decisions about how money will be set aside in the reserve fund and the circumstances under which money in it will be spent.  

Use of Funds. The model policy provides that the selectboard will only use the reserve fund for the purpose for which it was created or for other purposes when authorized by a majority of the voters at an annual or special meeting.   

A balanced budget is necessary for proper financial management in local government. Overestimation of municipal revenues, deferral of maintenance, replacement of capital assets, and inadequate funding of municipal obligations can necessitate borrowing or increases in tax rates, both of which can limit a municipality’s ability to provide future services. 

Budget Creation and Administration. By tradition, the selectboard prepares the budget for voter approval at the annual town meeting; by law, it sets the tax rate necessary to raise the specific amounts voted. The selectboard manages the town budget through the course of the fiscal year under its authority to sign orders for payment of town funds. To approve orders, the board must meet and, by a majority of the total number of members of the board, vote to authorize the treasurer to disburse money. The selectboard may vote to authorize one or more members to examine and approve the payment of certain town expenses. 

Unanticipated expenditures and revenue shortfalls caused by unforeseen circumstance can require a transfer of money between line items or even deficit spending. The model policy provides that the municipal budget will be administered to provide services in a manner consistent with the voters’ expectations in light of actual circumstances and managed to avoid deficit spending and short-term borrowing. 

Line-Item Transfers. The model policy also provides that all transfers between budget line items will require a majority vote of the selectboard.  

Budget Closing Plan. At the close of the fiscal year, the treasurer will present a budget closing plan to the selectboard, making recommendations for transfers between line items and recommendations for the application of any budget surplus. Approval of the plan will require a majority vote of the selectboard. Any annual budget deficit will be addressed in accordance with 24 V.S.A. § 1523(a). 

Standard of Care. The policy should provide a clear delineation of responsibilities for carrying out the investment activities of the municipality. The Government Finance Officers Association (GFOA) recommends using the “prudent person” rule of investment as the standard of care. This rule provides that investments should be made with judgment and care, under circumstances then prevailing, which persons of prudence, discretion, and intelligence exercise in the management of their own affairs, not for speculation, but for investment, considering the probable safety of their capital as well as the probable income derived. 

In addition, the policy should include a conflict of interest statement, directing those responsible for investing town funds to refrain from personal business activities that could conflict with the proper execution and management of the investment program. 

Authorized Institutions and Authorized Investments. Public deposits should only be made in qualified public depositories as established by state law, and the policy should include guidelines as to the information that should be submitted by financial institutions. The municipality should also review the various investments that are permitted under state statutes and determine which investments are appropriate for their size and the type of portfolio they will have. 

Maturity and Diversification Guidelines. Investment portfolios should be diversified to avoid an over-concentration of assets in any particular maturity, issuer, or class of securities. Maturity guidelines should reflect the cash flows of the municipality and the purposes of the investment. Shorter term investments provide readily available funds to meet expenditure requirements. The policy should limit the amount of funds that may be invested in any one issuer to avoid significant credit risk. Further, the policy should establish guidelines as to the diversification of investments by class of security. 

Collateralization. Exposure to custodial credit risk – the risk that the municipality may not be able to recover its deposits in the event of the failure of the depository institution – can be minimized by collateralizing all deposits, and by having that collateral held in the name of the municipality with a third party bank or with the bank’s trust department. 

Reporting. The policy should specify the frequency and format of any reporting of the investment portfolio. The reports should be issued frequently enough to give an accurate picture of the funds that are available and should provide enough detail for the users to understand the transactions for the period and the status of the portfolio at the end of the period. The policy should also establish benchmarks to determine the performance of the fund. The benchmarks used should be based on similar investment objectives and risk tolerances of comparable municipalities. 

For more information on municipal investment policies, please refer to Financial Policies: Design and Implementation, published by the Government Finance Officers Association. A copy of this document can be purchased at www.gfoa.org. 

The Government Finance Officers Association’s (GFOA) recommended practice on cash receipts controls suggests that proper controls over revenues are imperative to ensure sound financial management practices, instill public confidence in municipal operations, and provide accurate, reliable, and timely information on which financial decisions can be made. Budgeting, revenue forecasting, account reconciliation and review, and financial reporting all rely on the proper recording of revenues. Local officials need to provide for appropriate mechanisms, both automated and manual, to collect all funds legally due to the entity and ensure that proper controls exist over all receipts. 

Appropriate internal control procedures should be implemented to ensure the safeguarding of all receipts. One of the most important procedures is the segregation of duties. No one individual should be able to authorize or initiate a transaction, record the transaction in the accounting records, maintain custody of the asset resulting from that transaction, and reconcile the activity in the accounting records that pertain to that transaction. All internal controls should be in writing and reviewed on a regular basis. 

Consider the following when developing a cash receipts policy: 

Authorized Personnel. Only authorized personnel should receive town funds. The model policy that follows includes a list of local officials who could, in the course of their duties, receive funds on behalf of the town. Towns adopting this policy may choose to include other officials in the list or remove officials who are not strictly required to receive funds as part of their statutory duties. 

Timely Deposits and Reconciliations. Deposits should be remitted to the bank in a timely manner, preferably daily, and recorded in the accounting records in a timely manner. This both lessens the risk of loss or theft and allows for the funds to be available for investment as soon as possible. Reconciliations to both the general ledger and to any supporting account ledgers should be routinely performed in a timely manner. The treasurer’s records should be reconciled to the monthly bank statements and to the reports received by other departments. Preparation of the reconciliations should involve more than one person. 

Returned Checks. Procedures should be established for processing and collecting returned checks. The procedures should include any fees that might be charged to the check writer, any restrictions that may apply to the repayment of the uncollectible amount, and how the transaction would be recorded in the accounting records. 

Petty Cash. A cash receipts policy should require all deposits to be made intact – that is, no cash that is included in the deposit should be used to pay for municipal expenditures. If cash is needed for such expenditures, a petty cash fund should be used and proper procedures for its utilization should be established. 

Please note that this model policy has been developed for illustrative purposes only. VLCT makes no express or implied endorsement or recommendation of any financial policy, nor does it make any express or implied guarantee of legal enforceability or legal compliance, nor does VLCT represent that any particular policy is appropriate for any particular municipality. Your legal counsel should review any proposed financial policy before adopting it. 

As always, please contact the Municipal Assistance Center if you have questions at info@vlct.org or 800-649-7915.

Though most Vermont municipalities take a very conservative approach to debt, a formal debt management policy can be an important financial management tool for town government. When debt is issued, it obligates the municipality to make regular payments for a number of years into the future. As a result, debt service can impact a town’s financial condition over the long term and can limit flexibility to respond to changing needs and priorities. 

Vermont law provides a very high ceiling for the limit of municipal debt. According to 24 V.S.A. § 1762, a municipality may not incur an indebtedness for public improvements which, with its previously contracted indebtedness, in the aggregate exceeds ten times the amount of the last grand list. Other statutes on municipal borrowing authority are found in V.S.A. 24, Chapter 53. 

A municipal debt management policy will provide written guidelines affecting the amount, issuance, process, and type of debt. A debt management policy establishes criteria for issuing debt obligations so as not to exceed acceptable levels of indebtedness. Debt management policies transmit a message to the public and investors that the municipality is committed to sound financial management. These policies can also provide consistency and continuity in the debt issuance process. 

The following should be considered in the development of a debt management policy: 

Conditions for Debt Issuance. A debt management policy should specify the conditions or purposes for which the issuance of debt will be proposed by the selectboard, including the purposes and uses of each type of debt, the types of debt that will be utilized (short-term borrowing, capital lease agreements, general obligation bonds, etc.), life of assets acquired with each type of debt, and conditions for refunding debt. 

Restrictions on Debt Issuance. Debt management policies should also indicate any restrictions or limitations that are placed on the use of debt, including any prohibited uses, any limitations on the size of each issuance, limitations on the length of maturity for different types of projects, and any statutory limits on the amount of debt that can be issued. 

Debt and Debt Service Limits. A limit on the amount of outstanding debt that is allowed should be included in the policy. This limit can be expressed in terms of a percentage of assessed value or as an amount per capita. A limit on the amount of annual debt service (principal and interest) should also be specified. This limit can be expressed as a percentage of revenues or expenditures, including coverage requirements for revenue debt, or as an amount per capita. 

Characteristics of Debt Structure. Debt management policies should address the structure of debt issuance, including repayment provisions (level principal payments or level debt service payments), maturity guidelines, the use of debt service funds, and the investment of any bond proceeds (including a discussion of arbitrage regulations). 

Debt Issuance Process. Most municipalities in the state utilize the Vermont Municipal Bond Bank to issue general obligation debt, so their procedures detail the debt issuance process. Under other circumstances, the debt management policy would include discussion of the sale process, the use of professionals to assist in the issuance process, bond rating goals, disclosure requirements, and rating agency relations. 

For more information on debt management policies, please refer to Financial Policies: Design and Implementation, published by the Government Finance Officers Association. A copy of this document can be purchased at www.gfoa.org. 

Establishing good internal controls is one way to minimize the opportunity for fraud. Another good way is to adopt a fraud prevention policy that outlines what is expected of all employees in terms of their personal conduct, as well as their role and responsibility in reporting suspected inappropriate actions by others. 

A fraud prevention policy must inform employees that fraudulent acts will not be tolerated and explain that each employee has a duty to report any activity that appears to violate any law, regulation, or policy. The policy must also clearly outline the process that is available to report any suspected violation and assure employees that complaints will be investigated confidentially and without retaliation of any kind. 

Vermont law provides that town auditors may – and, if requested by the selectboard, shall –examine the records of any town officer authorized by law to receive or disburse money belonging to the town. If the town has voted to eliminate the office of auditor, this authority is vested in the public accountant upon request of the selectboard. Any town officer who refuses or neglects to submit these records is ineligible for re-election and will be personally liable to the town for a civil penalty. 24 V.S.A. § 1686. 

Consider the following when developing a fraud prevention policy: 

Explanation of Fraudulent Activities. Fraud prevention policies should begin with a statement stressing the town’s interest in encouraging ethical and honest behavior. It should include an explanation as to what constitutes misconduct or dishonest behavior and clarify that fraud is very different from errors or mistakes. Unlike errors or mistakes, fraud is the result of a deliberate act, an intentional deception to misappropriate assets or to manipulate data for personal gain. The policy should also state that the municipality will not tolerate any acts of fraud, regardless of the dollar amount involved. 

Responsibility to Report. The policy should emphasize that each employee has a responsibility to immediately report any suspected acts of fraud. The policy should identify to whom an employee should report, and what to do if that individual is the one suspected of fraud. 

Investigation and Reporting. Included in the policy should be the process for investigating the complaint, and a statement assuring employees that reports will be treated in a confidential manner and that retaliation will not be tolerated. The policy should also address the matter of false allegations and the consequences that may result from such allegations. At the conclusion of the investigation, a written response to the reported incident should be made, which will be a public document.