Dear Editor,
Many cities ask: how much in savings is needed to cover risks and obligations in a community? Known as fund balance, this amount is intended to serve as a measure of a city’s financial resources available to protect taxpayers from unexpected changes in financial condition, keep services running smoothly, and avoid sudden tax increases or service reductions.
It is there for emergencies or unforeseen circumstances that occur in every community from time to time. While there are generally accepted policies in cities across the country, more is needed when a city’s infrastructure is lacking, as is clearly the case in Madison.
Here are the main reasons fund balance matters:
Cash flow stability
Cities often receive major revenues, such as property taxes, only a few times a year, while expenses occur daily. A fund balance helps pay for employees, police and fire services, utilities, and vendors between revenue collections.
Emergency preparedness
Natural disasters, equipment or infrastructure failures, lawsuits, economic downturns, and unexpected repairs can occur at any time. A healthy reserve allows the city to respond quickly without borrowing money or cutting services.
Credit ratings and borrowing costs
Bond rating agencies closely evaluate fund balance levels. Strong reserves can improve a city’s credit rating, lowering interest costs when borrowing for roads, water systems, parks, or public buildings.
Economic downturn protection
During recessions, revenues such as sales taxes and development fees may decline. A fund balance allows the city time to adjust gradually rather than making abrupt layoffs or service reductions.
Avoiding short-term debt
Without reserves, cities may need tax anticipation notes or other short-term borrowing simply to cover operations. Borrowing increases interest costs and financial risk.
Long-term financial planning
A healthy fund balance allows cities to plan major projects responsibly and meet future obligations without financial instability.
Public confidence
Residents, businesses, and employees generally have more confidence in a city that is financially stable and well prepared for uncertainty.
Not all fund balance is “extra money.” Some portions may already be legally restricted, committed to specific projects, or set aside for future obligations.
Many finance organizations, including the Government Finance Officers Association, recommend that general-purpose governments maintain an unrestricted fund balance equal to 2 to 4 months of operating expenditures. However, the appropriate amount depends on a city’s risks and revenue stability.
It is also important for the city to plan major projects responsibly and address future obligations without financial instability. The city is currently developing a capital improvement plan by assessing immediate and long-term needs. The next step will be to appropriately plan and budget appropriately for capital maintenance and replacement needs, resulting in stronger infrastructure and utility systems.
The city is also committed to building trust and confidence with the public. To do so, we must set priorities, establish goals, and operate in a financially stable manner with a healthy fund balance. Our future depends on it.
Sincerely,
Karen Stapp
Finance Director, City of Madison