What should be the focus of a fund balance policy within a governmental entity?

A fund balance policy within a governmental entity should primarily focus on the unreserved fund balance. This component of the fund balance reflects the portion that is not constrained by any restrictions and can be utilized for any purpose within the government's operational framework. It provides a more accurate picture of the funds available for discretionary use and is crucial for financial planning and stability.

Unreserved fund balance can help the entity manage its cash flow, respond to emergencies, and fund new initiatives without the need for additional revenue sources. In contrast, while total fund balance includes both reserved and unreserved funds, it may provide a less clear picture since reserved balances are committed for specific purposes and cannot be easily accessed for general spending. Focusing solely on reserved fund balance would limit the flexibility of the entity to respond to financial needs, and projecting budget surpluses is more speculative and less about the current availability of funds.

Thus, having a policy that primarily considers the unreserved fund balance ensures that the governmental entity maintains sufficient resources available for unforeseen circumstances and strategic planning, supporting overall financial health and accountability.