For an informative and insightful article on city reserve policies, click on the title post above or http://www.csmfo.org/download/index.cfmfuseaction=download&cid=1456.
Selected excerpts from the article, MANAGEMENT OF PUBLIC FUNDS – THE ADOPTION OF RESERVE POLICIES IN CALIFORNIA CITIES by Anita Lawrence, Finance Director for the City of Camarillo (2000, 2001, 2005), as follows:
CHAPTER 1
PROJECT OBJECTIVES
Introduction
...when determining the amount to set aside, how much is too little and how much is too much? In other words, what is the “prudent” or right amount for that individual city? How much would be enough to cover certain unanticipated events and develop a sense of security for the organization and the community? On the other hand, at what level would the constituency begin to question it as too much? What is the risk tolerance of the organization and the community? And what criteria should be used in making that decision?
Objectives of Project
Guidelines which could assist cities in setting reserve level policies generally do not exist. The final outcome of this project will be the development of a product that will support finance professionals in California cities when they formulate and recommend reserve level policies to best fit the cities they work in.
Political Culture
It is expected that city finance professionals will likely have different points of view regarding what level of reserves is tantamount to hoarding taxpayers’ money and what level is prudent. This project will recognize that it is possible to find differences in opinions and provide an additional dimension which will measure the role of political culture in establishing the level of adequate reserves. There really is no right or wrong answer. Cities must define their own political culture as the foundation from which their own reserve level policy should be developed. It is also important to recognize that while certain criteria may need to be considered when setting reserve policies, it may not be necessary, nor politically advisable, to reserve 100% for every contingency considered. It is very unlikely that all contingencies would arise at once requiring the need to exhaust the entire reserve.
Bill Statler served as the Director of Finance/City Treasurer for the City of San Luis Obispo for twelve years.
In the context of a balanced budget policy, it tells you when you have too little and even when you have too much. “Having a policy forces you to think about the underlying reasons why you set that limit in the first place which is probably more important than the number you arrive at. It makes you analyze each of the reasons you have a policy at all.”
...cities should have an articulated minimum and maximum reserve level. Having a minimum allows the city to respond to a downturn in the economy or cover a major unforeseen contingency in a construction project without having to make drastic decisions that may have an immediate impact. Having a maximum prevents the city
from building its reserves beyond a reasonable amount.
Of 205 respondents, one hundred eighty-nine (189) or 92.1% of them either somewhat agreed, agreed or strongly agreed that California cities should have reserve policies.
Sixty percent of those that said they had a policy said they express it as a percentage of operating expenditures.
RESERVE POLICY RANGES
Method of Measurement Range
As a flat amount $1 to $20 Million
As a % of either revenues or expenditures 2% to 150%
MOST COMMON RESERVE POLICIES
(IN BRIEF)
Number of
Respondents Policy (In Brief)
15 10% of operating expenditures
11 15% of operating expenditures
10 20% of operating expenditures
9 25% of operating expenditure
6 50% of operating expenditures
For the General Fund, less than 10% (19) of those that responded reported reserves of less than 5%. Fifty-nine percent (118) fell in the 10% to 49.99% range. Only 5% were above 100%.
Seventy-five percent of the cities report a General Fund reserve of more than 10%.
CONCLUDING REMARKS
The results of this research demonstrate that a vast majority of finance professionals think that cities should develop reserve policies. It is also clear that certain criteria should be examined when formulating a reserve policy; however, there is a wide range of opinions regarding the degree of importance that should be placed on each of them. It is also clear that selecting the criteria to be considered varies from city to city depending upon the experience and political culture of that particular city. Each city should look to the past to determine which criteria should be considered when developing a policy to protect the future. At the very least, they should consider the following four criteria when formulating policies for their city:
♦ Cash Flow
♦ Exposure to Natural Disasters,
♦ Exposure to Economic Impacts
♦ Vulnerability to Actions from the State.
Public officials have been given the task of preserving the public trust and making decisions that are in the best interest of their city. A reserve policy is one of the most important policies a city can adopt to ensure the fiscal health of the city. By keeping a close watch on the reserve levels compared to the adopted policy, public officials can be forewarned of trends that may jeopardize the city’s ability to provide essential services to the community.
Another interesting item is the City of Glendale’s INTERDEPARTMENTAL COMMUNICATION of October 17, 2001 on City Financial Reserves (http://www.ci.glendale.ca.us/admin-svcs/pdf/city_financial_reserves.pdf)
The communication cites the Purposes of Reserves:
1. Legal and Accounting Requirements
2. Emergencies and Natural Disasters
3. General Fund Revenue
4. Economic Uncertainties
5. Financial Flexibility
6. Financial “Peace of Mind”
The communication surveyed 13 California cities; the most common method of comparing Fund Balances was as a percentage of General Fund budget. Another method and meaningful comparison for Fund Balance analysis/policies is Fund Balance Per Capita – General Fund.
FUND BALANCE AS % OF GENERAL FUND BUDGET
Range: 7.8% San Bernadino – 134.4% Burbank Average 42.8%
Note: Carmel-by-the-Sea 82%
FUND BALANCE PER CAPITA - GENERAL FUND
Range: $32 San Bernadino - $1,875 Santa Monica
Average $218
Note: Carmel-by-the-Sea $2,341.
Survey Cities:
13 California Cities
Glendale
Burbank
Pasadena
Inglewood
Anaheim
Htg. Beach
San Bern.
Riverside
Torrance
Santa Monica
Santa Ana
Long Beach
Garden Grove
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