2/5/2014
Fund Balances — Identify the Risks
Categories: Municipal Debt
Several newsletters ago we included an article entitled “Public Referendum, Voter Approval or Not?” The article sought to frame the assessment of whether to seek a public referendum when issuing a bond to finance a public project; one of those issues which is so common in government where the rationale for a particular policy is as important as the policy itself. The process of establishing a fund balance strategy is clearly one of these instances as well. Discussions hinge on political and social questions as much as they hinge on finance and economics.
“After all, whose money is it anyway?”
Clearly this frames one of the most significant underlying concerns and more often than not, the kick off subject of any discussion about fund balances. Most reasonable government officials understand that the public believes they, the public, are better equipped to spend their hard earned dollars and for that reason there should be no excess funds in tax coffers. A fund balance is simply an indication that a municipality has either over taxed their constituents or incorrectly projected what its annual expenditures will be.
So why then carry any fund balance at all? While this may seem like an extreme position to take, we should remind ourselves that such a conversation does serve a crucial purpose. It serves to establish a standard of care or level of expectation, which officials need to be cognizant of and prepared to justify.
On the most generic level, I think any public official would be hard pressed to find a constituent that does not maintain a balance in their personal check book. And so, this always serves them well as a good starting place to respond to an objection by a resident. However, in the course of delivering our services to municipal clients, we find ourselves taking the discussion to a more philosophical level, the outgrowth of which assists in forming the basis of fiscal policy. We introduce the idea that over and above government’s responsibility to efficiently manage municipal finances, shouldn’t part of it’s fiscal/political mandate be to prevent economic shock to their community and manage risk.
How can one manage risk or plan for the unknown other then to maintain a reasonable fund balance? After all, isn’t it the nature of the unexpected that it cannot be anticipated or planned for? Certainly, double digit tax increases to meet un-expected expenditures disrupt a household’s financial picture.
Easily the only certainty about risk or the unexpected is that unplanned events occur. Therefore, the discussion of needing to plan for such occurrences is moot and quickly moves to making sure our municipal clients are reasonably prepared. While in many conversations about policy or strategy it serves the discussion well to keep it general, we have found that in establishing fund balance parameters, it is best to “game” the specific risks communities face, establish the potential fiscal impact of each, and utilize the analysis to determine the sufficiency and availability of funds. It is important to note that there are two issues to be concerned with here:
- the sufficiency of dollars, that is, has enough been set aside to meet the need and
- are these funds readily available, meaning, how liquid are they and has an appropriate reserve account been created. Reserve accounts should be specific enough so as to convey the purpose for which its funds should be expended, while the resolution language creating the account and its location should accommodate enough flexibility to meet all potential risks.
We understand that during Hurricane Katrina, the City of New Orleans used debt service funds to pay operating costs. Some time ago we met with a municipality who’s response to our discussions regarding the types of risks they may encounter and the sufficiency of their funds was that its Highway Fund had adequate reserves to meet all of their needs.
Obviously in an emergency or disaster situation, municipalities are responsible to safeguard and rebuild their community. Under the stress of the moment, who is to speak out on what may only be a technicality in utilizing funds improperly. Interestingly enough, the public usually has a lot to say, once the smoke clears.
Thus, clearly identifying the risks and not only establishing the sufficiency but the availability of funds, demonstrates the necessary standard of care and provides an acceptable rationale for maintaining a fund balance.
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