As follows, selected excerpts from 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) concerning questions and criteria managers should consider when formulating a city’s reserve policy.
In Evaluating Financial Condition, a 1994 publication by the International City/County Management Association (ICMA), p. 198, one of the appendices includes a discussion on analyzing reserves. The discussion offers the following commentary:
There are no rules for determining which kinds of reserves a government should have or what level of funding should be in any reserve. Much depends on the kinds of natural disasters or hardships that the jurisdiction is subject to and the adequacy of its insurance coverage, the flexibility of the jurisdiction’s revenue base, the overall financial health of the local government, state regulations, and national economic conditions.
The need for reserves is determined primarily by the degree of risk associated with revenues and revenue sources, and by the likelihood of major contingencies and the amount of funds required to respond to them. The following are questions managers can ask to see how well their community is protected against risk, as well as how much flexibility is available to meet special needs.
• What is the potential for revenue shortfalls – that is, how stable is the tax base in the face of adverse economic conditions?
• How much of the budget now depends on intergovernmental funds, and what are the chances that these funds might be terminated?
• What is the present policy on equipment replacement? Would replacement of a large item, such as a fire truck or road grader, severely distort the budget or disrupt service?
• What kinds of insurance protects the government against loss from legal suits or destruction of assets? Will the insurance cover all the loss or only a portion of it?
• What kinds of losses might the government suffer from natural disasters? What federal or state programs can help?
• How much and how quickly could the government borrow in the event of a problem?
• How much liquidity is usually available in the government’s accounts?
“…the National Advisory Council on State and Local Budgeting
(NACSLB)…They encourage a policy that identifies the use of these funds for temporary
cash flow shortages, emergencies, unanticipated economic downturns, and one-time opportunities.
“Taxpayers expect government to use taxes to provide essential services, not to create huge savings accounts.”
The specific criteria that were identified for establishing reserve policies:
1) cash flow
2) exposure to natural or other disasters
3) exposure to economic conditions
4) vulnerability to State actions which results in reduction of income
Respondents were also provided the opportunity to supplement this list with other criteria they thought was important. The additional criteria provided is as follows:
♦ Ability of Council to review and adjust accordingly -Council direction/actions/ opinion/education level - political issues and considerations.
♦ Unanticipated needs/projects - to sustain quality service/meet service demands/ contingencies/cost overruns – ability to respond to contractor actions.
♦ Insurance deductibles.
♦ Capital replacement - project or program facilitation pool - asset condition.
♦ Opportunity - ability - deterrent to overspending - management policy.
♦ Reliance on Reserves to generate investment income for operations.
♦ Increasing public safety contract costs/labor negotiations.
♦ Community sentiment/expectations - bad information.
♦ Indenture requirement - improved bond ratings - long term liabilities/debt.
♦ Size of annual budget - predictability of income and expenditure requests.
♦ The overall flexibility and capability of the management system to provide resources to match fortuitous events without special reserves for contingencies.
(Source: 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).
QUESTIONS UNIQUE TO CARMEL-BY-THE-SEA
• What is the City’s Reserve Policy?
• What criteria has the City used to determine the appropriate level of reserves?
• What is the City’s rationale for Fund Balance as % of General Fund Budget 82%?
• With Fund Balance as % of General Fund Budget 82% and Fund Balance Per Capita – General Fund $2,341, and millions and millions of dollars in deferred maintenance, is the Fund Balance “tantamount to hoarding taxpayers’ money” or “prudent?”
• Is the City violating taxpayers expectation that “Taxpayers expect government to use taxes to provide essential services, not to create huge savings accounts?”
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