Sunday, July 14, 2024

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County, municipalities vary in their use, calculation of “fund balance,” i.e. savings

A bursting municipal savings account has provided Elon’s town manager with a ready source of cash for the proposed budget he presented to the town’s leaders earlier this week. [See story on Elon manager Richard Roedner’s presentation of his budget to the town council here:  ]

But this urge to break open the figurative piggybank may not appeal to other local government administrators as they, too, look for ways to make ends meet in the next fiscal year.

In theory, a well-stocked financial reserve is an invaluable asset to counties and municipalities as they lay out their spending plans for the new fiscal year. In fact, the role that savings play in leveling the ledger is evident in the very term “fund balance,” which local governments use to refer to their financial nest eggs.

Yet, the actual extent to which each jurisdiction can draw on its savings will vary immensely depending on its past spending decisions as well as the accuracy of its revenue projections.

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The savings themselves can also be quite convoluted – with each account split into multiple parts that are subject to restrictions based on some rather arcane rules of accounting. To make things all the more complicated, most local governments have multiple savings accounts that can intermingle in ways which leave the uninitiated utterly dazed.

All the same, this mystifying multiverse of public finance can have some very real consequences for ordinary residents, who may rue the results when they pay their property taxes or begin to see rollbacks in basic government services.

 

‘General’ disarray

The starting point for any deep dive into local government savings is ineluctably the “general fund” – a repository for various taxes and fees that bankroll most of the operations of a city or county.

In the case of Alamance County’s government, the general fund accounts for roughly $200 million in annual outlays, and its financial reserves must be correspondingly massive to serve as an adequate financial cushion.

The county’s general fund is ultimately part of a galaxy of financial accounts that also include insurance funds for employee healthcare and worker’s compensation, a so-called enterprise fund for the county landfill, and various fiduciary funds that the county maintains on behalf of its cities and towns. The county government’s books also contain capital funds to pay for construction and maintenance projects and others to corral restricted revenues like the county’s cache of federal pandemic relief.

Many of these sundry and assorted funds are accompanied by their own financial reserves.  Yet, it’s ultimately the savings attached to the general fund that balance the budget, as Susan Evans, the county’s finance director, is wont to observe.

“When you look at the general fund, that’s where county operations are happening,” Evans explained in an interview earlier this week. “When you get into the other funds, that’s money which can only be used for specific purposes.”

 

There be dragons…

According to its most recent audit, the county possessed a general fund balance of $91,422,308 when it wrapped up the fiscal year that ended on June 30, 2023. Yet, much of this money isn’t readily available to the county’s administrators right now as they brood over their spending plan for the upcoming year.

Tied up within the county’s general fund balance are various pots of money that are explicitly off limits to county officials. The county’s annual audit designates most of these “restricted” dollars for “stabilization by state statute” – a term of trade that refers to the minimum amount of cash which state law obligates a particular unit of government to have in its reserves.

Evans is quick to point out that this “stabilization” line item is different from the so-called “8 percent rule” – the oft-cited guideline that a local government should maintain cash reserves equal to at least 8 percent of its annual operating expenses. Evans, who dismisses this putative rule as a “myth,” notes that the actual requirement is significantly more complicated. To quote the relevant state statute:

Appropriated fund balance in any fund shall not exceed the sum of cash and investments minus the sum of liabilities, encumbrances, and deferred revenues arising from cash receipts, as those figures stand at the close of the fiscal year next preceding the budget year.

In the county’s case, this mandatory minimum came to $15,366,079 for the fiscal year that ended in June of 2023. This figure was tantamount to about 7.8 percent of the $196,888,272 that the county’s general fund actually expended during the course of that cycle.

In either case, this portion of the county’s fund balance is like the edge of a medieval map – a point beyond which no local government financial director would dare to proceed.

[Story continues below chart on fund balances in county government, local municipalities.]

 

Unassigned and delivered

Also included in the county’s general fund balance is money that has been earmarked for particular purposes. These funds are deemed “committed” if the board of commissioners has set them aside for some specific use. Or they may be classified as “assigned” if the commissioners have actually budgeted the money. In either case, these dollars are generally glossed over during the county’s budget preparations.

Yet, the portion of the general fund’s savings that’s most germane to the budget process is the “unassigned fund balance.” This kettle of cash is free and clear for the board of commissioners to use for practically any purpose it chooses. It is also the figure that the county’s administrators are most apt to consider when they want to know precisely how much expendable revenue they have at their disposal.

Several years ago, the board of commissioners adopted a formal policy that calls on the county to maintain an unassigned fund balance equal to at least 20 percent of the general fund’s operating expenses. This policy grew out of a financial crisis that the commissioners themselves had precipitated about a decade ago when they deliberately depleted the general fund’s savings in order to avoid raising property taxes.

This strategy eventually caught up with the county’s governing board when revenues began to dry up after the financial collapse of 2008. The county’s reservoir of available cash consequently dipped below 11 percent of its annual budget, earning a stern rebuke from the N.C. Local Government Commission, an arm of the state’s department of revenue that monitors local government finances.

In response to this state-level warning, the county implemented furloughs and other austerity measures that helped keep the state government at bay until it was able to replenish the fund balance thanks to increases in revenue from sales and property taxes.

By the time that the county commissioned its latest annual audit, the general fund’s unassigned savings had ballooned to $46,767,306 – or about 23.8 percent of the fund’s annual outlays. Under the county’s aforementioned policy, the commissioners were free to transfer the excess over 20 percent to a capital reserve fund. They eventually availed themselves of this option in February when they formally redirected $7,743,054 into the county’s capital reserves.

In addition to this transfer, the commissioners have also periodically dipped into the unassigned fund balance to bankroll mid-year pay raises and other expenditures that didn’t appear in the county’s original budget. In the meantime, this same pot of money has served as a convenient expedient to balance the county’s annual budget. More often than not, the county’s administrators have penciled in some of these savings to bridge the gap between the general fund’s projected revenues and its anticipated expenses. In the spring of 2022, for example, the commissioners set aside $6,470,426 from the unassigned fund balance to cover their expected costs.

As things turned out, the county had no need to actually draw on these funds as its revenues over the course of the year beat expectations and its expenses proved lower than budgeted. As a result, the county’s most recent audit indicates that the general fund balance ultimately gained $6,647,904 by the time that the year ended in June of 2023.

As resilient as the general fund’s savings may seem at the moment, Evans is adamant that the commissioners should resist the temptation to milk these accumulated reserves for all that they’re worth.

“When you’re using fund balance, you’re using it for one-time purchases or one-time expenditures,” the county’s finance director went on to emphasize. “We’re frugal with our fund balance, and we don’t want to get where we’re relying on our fund balance for our operational needs.”

 

Municipal larder

The county finance director’s approach to the fund balance is very much in line with the conventional wisdom among the wizards of public finance. Yet, this cautious policy on the use of reserves has, at times, been thrown to the wind by local government officials who have found themselves sitting on especially large piles of cash.

One jurisdiction that has found itself in this rather enviable position is the town of Elon, which has amassed a particularly voluminous fund balance over the past several years. According to the town’s latest audit, unassigned dollars comprised $8,888,350 of the $10,518,004 its general fund balance – a sum that actually exceeded the general fund’s outlays of $8,500,928.

Given this embarrassment of riches, Elon’s town manager Richard Roedner has floated a plan to deliberately draw down the general fund’s savings in the town’s next annual budget. In presenting this plan to Elon’s town council, Roedner admitted that doesn’t expect to have similar opportunities to drain the fund balance in future financial cycles.

“It’s great while you have it,” he added, “but you can’t plan on having that kind of fund balance forever.”

It’s too soon to tell if Roedner’s call to open the sluices will have any echoes in the county’s other cities and towns.

The conditions for a similar response may also exist in the city of Graham, where the general fund boasted some $12,108,538 in unassigned savings in the fiscal year that ended in June of 2023. This figure amounted to roughly 75 percent of the general fund’s outlays, which totaled $16,253,758 according to the city’s latest annual audit.

In Mebane, unassigned savings made up a more modest 47 percent of the general fund’s outlays for the same financial cycle. The town’s audit for that particular year put these usable reserves at some $11,989,171 – in contrast to that year’s expenditures of $25,481,676.

Meanwhile, the city of Burlington ended the year with a comparatively meager $3,408,712 in unassigned savings – the equivalent of about 4.6 percent of the $74,763,640 that the general fund had expended during the last fiscal year. Yet, its own internal calculations, Burlington’s finance department apparently beefs up this figure by factoring in the one line item that other local governments are most desperate to skirt.

According to Burlington’s finance director Peggy Reece, the city includes the dollars that are reserved for “stabilization by state statue” when it determines the amount of cash that it has in the kitty.

“We’re probably a little more complex than the other municipalities,” Reece went on to concede in an interview earlier this week. “If you take the [line labeled] ‘stabilization by state statute,’ you’re looking at money that’s really uncommitted but which we’re required by state statute to have. So we combine this with our uncommitted fund balance to get our percentage.”

Using this method, the city’s finance department was able to claim a fund balance percentage of 18.2 for the past fiscal year. This figure is nevertheless a bit of a drop off from the 25.7 percent that the same method garnered a year earlier. Either way, the city’s computations are merely a bookkeeping reference that makes no claims the city will actually tap into its statutory minimum.

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