Now here's a topic that's sure to captivate! Well, probably not, but since it's become a topic of conversation, I thought I'd attempt to address it.
First, a fund balance is most simply the difference between assets and liabilities in a governmental fund. The fund balance is not cash sitting in a checking account waiting to be drawn down. While cash is a small component, investments, accounts receivable and inventories are also added into the total assets calculation.
Why maintain a healthy fund balance? The fund balance has multiple purposes. First, not every revenue comes in at a steady rate and not every expense is divided equally over the year. For instance, the second property tax payment for the budget year doesn't come to the City until September, but the majority of the road work and summer maintenance is complete. So while we are waiting for the second property tax payment and awaiting the sales tax for the rest of the year, we need cash and investments on hand to pay suppliers and contractors. Without a fund balance, we wouldn't always have the cash on hand. So we need funds there.
Another reason for the fund balance is to be prepared for a disaster. It's prudent to have funds set aside in the event of a natural or man-made disaster. If a tornado were to hit Sterling and tear up infrastructure, how would we pay the bill for repairs and cleanup? How do we pay overtime to keep employees working through rescue and the cleanup? In two years we find out that a material used to construct the firehouse or the Coliseum is a known carcinogen and the building needs to be razed and rebuilt and revenues aren't significant enough to issue a bond. We would need the reserves to do the work.
Even if we were able to bond, bonding costs are in part determined by the bond rating of the City. Without adequate reserves, the bond rating suffers. A lower bond rating means higher costs which can cost the City tens or hundreds of thousands of dollars in interest payment costs.
We also have to be prepared for economic catastrophe. There is no doubt these are bad times. While we're at 9.8% unemployment locally, in 1933, unemployment spiked nationwide at 24.9%. Even as recent as the early 1980's, much of the Midwest was in the mid to high teens for unemployment. If we reach those levels again, then we will likely be compelled to make use of our fund balances.
To make the most of the reserve funds, the vast majority of it is not in cash. In fact, the majority is held in long-term investments to maximize returns. Those returns are then used as revenues in our budget. That said, not all the investments are readily available. Some investments have maturity dates that extend out 10 or even 20 years. A sound fiscal policy involves investments coming due at staggered intervals so that some monies are constantly available while others are earning the most interest possible in safe investments.
Using fund balances to pay ongoing operational costs is generally not advisable, particularly when the budget deficit is not foreseen as a one-time problem. We do not see the City's budget issue as a one-time or short-term issue. While prior to this year, revenues continued to rise, so did personnel expenses. The problem is the rise in personnel expenses is outpacing the rise in revenues. While revenues may rise 3%-5% in past years, expenses for health insurance and pensions have far exceeded that pace, to the point that pension and health increases are rising at more than twice the rate of revenues. That trend cannot be sustained, which is why the City has to act early and prudently. If we merely use fund balances to solve our budgeting woes, our deficit will only accelerate over time as the cost of employees increase and fund balances disappear, taking with them interest earnings that were previously used to help pay for those very employee costs. Investment and interest income from the General Fund fund balance was worth over $250,000 in revenues. That's not a revenue stream we want to see sacrificed to so we can put off today's hard decision for what becomes tomorrow's even harder decision.
How's that for boring your socks off? If you stuck with that and read it through, congratulations! I hope you were able to gain some valuable insight.
