To calculate unrestricted net position for a state or local government, take total net position from the government-wide Statement of Net Position and subtract two components: net investment in capital assets and restricted net position. Whatever remains is unrestricted. The arithmetic is a one-line residual; the work is in getting the two subtracted components right, because every dollar misclassified into either one comes straight out of the unrestricted balance.
The Formula
GASB Statement No. 34 requires governments to report net position in three categories: net investment in capital assets, restricted, and unrestricted.1Governmental Accounting Standards Board (GASB). Summary of Statement No. 34 – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments GASB Statement No. 63 later added deferred outflows and deferred inflows of resources to the equation.2Governmental Accounting Standards Board (GASB). Summary of Statement No. 63 Total net position is:
Total Net Position = (Total Assets + Deferred Outflows of Resources) − (Total Liabilities + Deferred Inflows of Resources)
And unrestricted net position is the residual:
Unrestricted Net Position = Total Net Position − Net Investment in Capital Assets − Restricted Net Position
Data You Need Before You Start
Pull five figures from the face of the government-wide Statement of Net Position: total assets, total deferred outflows of resources, total liabilities, total deferred inflows of resources, and the reported net position categories if you are verifying rather than building the number from scratch.
The notes are not optional. Capital asset schedules give you gross values by category and accumulated depreciation. Long-term debt schedules tell you which bonds, notes, and leases financed capital versus operations. Bond indentures, grant agreements, and special revenue fund descriptions identify what is genuinely restricted. Capital asset and debt detail is the single biggest source of classification errors, so treat the notes as essential reading.
Keep one interpretive point in mind before you finish: non-spendable items like inventory and prepaid expenses sit within unrestricted net position because no external party constrains them, but they are not liquid. A large unrestricted balance inflated by warehouse inventory is not cash the government can spend.
Calculating Net Investment in Capital Assets
This component is the government’s equity in its physical infrastructure after removing the debt still owed on it.
Net Investment in Capital Assets = Capital Assets (net of depreciation) + Capital-Related Deferred Outflows − Capital-Related Debt − Capital-Related Deferred Inflows
Start with gross capital assets: land, buildings, equipment, and infrastructure such as roads and bridges. Subtract accumulated depreciation to reach net book value. Then subtract the outstanding principal on debt issued specifically to acquire, construct, or improve those assets. Only debt with a direct capital purpose reduces this component. General obligation bonds used for operating cash flow do not.
Two adjustments trip people up. If the government holds unspent proceeds from capital-related debt in a restricted account, the cash and the debt offset. The unspent proceeds are a noncapital asset, and the corresponding portion of the debt follows the asset, so neither shifts the net investment figure. Second, deferred amounts from debt refundings tied to capital debt belong in this component. A refunding at a loss adds the unamortized deferred outflow; a refunding at a gain subtracts the unamortized deferred inflow.
Accuracy here directly affects the unrestricted result. Understating capital-related debt makes this component look larger than it should, which pushes unrestricted net position down artificially.
Identifying Restricted Net Position
Restricted net position covers resources constrained by parties outside the government or by law. GASB 34 recognizes two sources of restriction.1Governmental Accounting Standards Board (GASB). Summary of Statement No. 34 – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments
- External restrictions imposed by creditors through debt covenants, grantors through funding agreements, or donors through gift conditions. A bond reserve fund the indenture requires the government to maintain is a common example.
- Enabling legislation the government itself passes that dedicates a revenue source to a specific purpose, such as a local-option sales tax earmarked for transportation. GASB Statement No. 46 clarifies that this qualifies as a restriction only if an external party, such as citizens or the courts, can compel the government to honor the commitment.3Governmental Accounting Standards Board (GASB). Summary of Statement No. 46
If the government holds permanent endowments or permanent fund principal, restricted net position must split further into expendable and nonexpendable pieces.1Governmental Accounting Standards Board (GASB). Summary of Statement No. 34 – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments The corpus can never be spent; earnings designated for a restricted purpose can be spent only for that purpose.
Why Board Designations Stay Unrestricted
Most classification mistakes happen here. When a city council sets aside $5 million of general fund reserves for a future park project, that money looks restricted but is not. GASB 34 draws a hard line: internal constraints that management or the governing board can remove or modify do not qualify as restrictions.4Governmental Accounting Standards Board (GASB). Statement No. 34 of the Governmental Accounting Standards Board – Basic Financial Statements and Management’s Discussion and Analysis for State and Local Governments Board-designated amounts stay in unrestricted net position.
The logic is simple. If the same body that created the designation can undo it with a vote, there is no genuine constraint on the resources. Governments may disclose designations in the notes, but the Statement of Net Position must report those amounts as unrestricted. Treating a designation as a restriction overstates the restricted component and understates the unrestricted residual.
Running the Residual and Checking the Netting
With the two subtracted components in hand, the arithmetic is direct. Take total net position, subtract net investment in capital assets, subtract every restricted amount you identified, and the remainder is unrestricted. There is no independent buildup for this figure. By design, it is whatever is left.
Two checks before you accept the number. First, confirm that liabilities and deferred inflows tied to restricted resources have been netted against restricted net position rather than unrestricted. Second, if liabilities related to restricted assets exceed those assets, the resulting negative restricted balance rolls down as a further reduction of unrestricted net position. Getting either netting step wrong is one of the most common reasons for a misstated unrestricted balance.
Reading a Negative Result
A negative unrestricted net position does not by itself mean a government is insolvent. It signals that long-term obligations exceed available unrestricted resources on paper. The single biggest driver is pension liabilities. GASB Statement No. 68 requires governments to recognize the full net pension liability on the government-wide statement, measured as the total pension liability minus the pension plan’s fiduciary net position.5Governmental Accounting Standards Board (GASB). Summary of Statement No. 68 For many governments, that liability runs into hundreds of millions of dollars.
GASB Statement No. 75 does the same for other post-employment benefits such as retiree healthcare. Because neither obligation is typically paid from restricted assets, the full amount usually flows to unrestricted net position. Related deferred outflows and deferred inflows land in the unrestricted column too, partially offsetting the liability but rarely enough to prevent a negative balance. Governments that fund long-term liabilities like compensated absences on a pay-as-you-go basis rather than as they accrue will also see unrestricted net position pulled lower. Context matters when interpreting the number.
New MD&A Explanation Requirements Under GASB 103
GASB Statement No. 103, effective for fiscal years beginning after June 15, 2025, overhauls the Management’s Discussion and Analysis section but does not change the three-category classification of net position.6Governmental Accounting Standards Board (GASB). Summary of Statement No. 103 The calculation steps stay the same. What changes is how the result must be explained.
Under GASB 103, the MD&A must present condensed financial information distinguishing between net investment in capital assets, restricted net position, and unrestricted net position, comparing the current year to the prior year. Management must explain why those balances changed rather than only showing the dollar or percentage differences. Significant policy changes such as tax rate adjustments or hiring freezes, along with important economic factors like shifts in the tax base, must be discussed if they materially affected operating results.7Governmental Accounting Standards Board (GASB). GASB Statement No. 103 – Financial Reporting Model Improvements If unrestricted net position swung significantly because of a new pension valuation or a large capital bond issuance, the MD&A needs to tell that story in plain language.