COMMENTARY: Mayor McCloud/City Councils Fiscal Record vs. Advocates of ‘Revenue Enhancements’ Position

Our city government, as a crucial component of long-term financial planning, should have a portion of general operating revenues in general fund reserve funds. It is important our elected officials understand that reserve funds are intended to assist local governments accomplish two fiscal goals: achieve tax stability and contribute to the provision of services.

RATIONALES FOR A FUND BALANCE

An important reason for maintaining a fund balance is as a means of financing large capital expenditures, such as the renovation of Forest Theatre, Scout House, Flanders Mansion and Public Works building, repair and maintenance of streets/roads/avenues, implementation of Master Plans (Mission Trail Nature Preserve Master Plan, Shoreline Management Plan, Del Mar and North Dunes Master Plan, Forest Hill Park Master Plan). Reserve funds can also serve as contingency funds which enable the City to respond to unanticipated events or emergencies. The aforementioned reasons are sound, legitimate reasons for a city to maintain an adequate fund balance. However, it is possible for a city to accumulate an excessively large fund balance; an excessively large fund balance would be one beyond the contingency and cash flow needs of the community in the short term, and one which lacks any planned use for other longer term projects or expenditures. In such a case, taxpayers are either paying unnecessarily high taxes or other charges, or they are not receiving an adequate return on their tax dollars in services and facilities.

For the City of Carmel-by-the-Sea, as of June 30, 2009, the latest audited figures, the City’s governmental funds (General Fund and special revenue funds) had a combined fund balance of $11,554,700, including $728,300 reserved, $9,342,200 designated for capital acquisitions and future expenditures and $1,484,300 neither reserved nor designated, relative to a $13 million annual budget.

The Government Finance Officers Association (GFOA) recommends that governments establish a formal policy on the level of unrestricted fund balance that should be maintained in the general fund. GFOA recommends, at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.

In establishing a policy governing the level of unrestricted fund balance in the general fund, a government should consider a variety of factors, including:

• The predictability of its revenues and the volatility of its expenditures (i.e., higher levels of unrestricted fund balance may be needed if significant revenue sources are subject to unpredictable fluctuations or if operating expenditures are highly volatile);

• Its perceived exposure to significant one-time outlays (e.g., disasters, immediate capital needs, state budget cuts);

• The potential drain upon general fund resources from other funds as well as the availability of resources in other funds (i.e., deficits in other funds may require that a higher level of unrestricted fund balance be maintained in the general fund, just as, the availability of resources in other funds may reduce the amount of unrestricted fund balance needed in the general fund);

• Liquidity (i.e., a disparity between when financial resources actually become available to make payments and the average maturity of related liabilities may require that a higher level of resources be maintained); and

• Commitments and assignments (i.e., governments may wish to maintain higher levels of unrestricted fund balance to compensate for any portion of unrestricted fund balance already committed or assigned by the government for a specific purpose).

That stated, it is useful to examine Mayor McCloud/City Councils Fiscal Record and the advocates of “revenue enhancements” position, as follows:

MAYOR McCLOUD/CITY COUNCILS FISCAL RECORD:

Since 2000, and as of June 30, 2009, Mayor Sue McCloud and City Councils have amassed a combined fund balance total of $11,554,700, including $728,300 reserved, $9,342,200 designated for capital acquisitions and future expenditures and $1,484,300 neither reserved nor designated. Arguably, the combined fund balance is not only excessive in relation to an annual budget of $13 million, but the accumulation of $9,342,200 designated for capital acquisitions and future expenditures is not the most productive use of taxpayer dollars or a best management practice of taxpayer dollars.

As previously stated, a sound and legitimate rationale for a reserve fund balance is to finance capital projects. Arguably, taxpayer monies designated for capital projects should be expended on projects, such as the renovation of the Forest Theatre, Scout House, Flanders Mansion, Public Works building, repair and maintenance of streets/roads/avenues, implementation of Master Plans (Mission Trail Nature Preserve Master Plan, Shoreline Management Plan, Del Mar and North Dunes Master Plan, Forest Hill Park Master Plan), et cetera. However, for the past eleven years, instead of using these funds to realize much needed projects, the City has accumulated more and more monies in reserve funds. Significantly, as a cost effective fiscal strategy, it is more cost effective to maintain city assets in good condition and less cost effective to substantally renovate city assets and repair streets after our city buildings and streets have deteriorated by benign neglect over years and years as a result of not annually budgeting for and expending adequate amounts to maintain city assets in good to excellent condition.

ADVOCATES OF “REVENUE ENHANCEMENTS” POSITION:

Advocates of “revenue enhancements” argue that the city needs a “new revenue stream” if the City is to “remain financially stable” by implementing a “parcel or utility tax, restaurant meal surcharge, paid parking, increased sales tax or transient occupancy tax.” However, given the magnitude of reserve funds, especially in relation to the annual budget, even for a small city dependent on tourism, City reserve funds should be decreased for the purpose of realizing capital projects, et cetera, prior to using the coercive power of city government to extract more dollars from taxpaying residents, visitors and guests, especially at a time of slow economic recovery and un- or under-employment.

Moreover, the City’s current reserve fund balances are excessive because the fund balances are well beyond the contingency and cash flow needs of the city in the short term, and particularly with regard to the $9,342,200 designated for capital acquisitions and future expenditures, the City lacks any serious planned use for longer term projects or expenditures. Ergo, taxpayers have not and are not now receiving an adequate return on their tax dollars in facilities or services.

CONCLUSION:

As the literature emphasizes, local government officials need to make a conscious decision about how large a fund balance they need to cover their cash flow and contingencies each year. They need to anticipate capital outlay and capital project needs and have a plan for financing those needs (a mindset of being dependent on grants for the realization of projects is unreasonable and unrealistic). Importantly, reserve funds are established to provide resources for an intended future use, not as a “parking lot” for excess cash or fund balance.

Finally, a new City Administrator will have the opportunity to utilize his/her background and experience to educate the public, elected and appointed city officials and city employees and facilitate a dialogue regarding prudent fiscal policies, budget priorities, fund balances, et cetera.

Related Links:
Best Practices in Public Budgeting
Government Finance Officers Association

BEST PRACTICE
Appropriate Level of Unrestricted Fund Balance in the General Fund (2002 and 2009) (BUDGET and CAAFR)