One way that cities prepare for future fiscal challenges is to maintain adequate levels of general fund ending balances. Ending balances, or “reserves,” while still at modestly high levels, are projected to decline as cities use these balances to weather the effects of the downtown.
Why do cities build ending balances?
- Ending balances are similar to reserves, or what might be thought of as cities’ equivalents to “rainy day funds,” in that they provide a financial cushion for cities in the event of a fiscal downturn or the need for an unforeseen outlay.
- Unlike states’ reserves, or “rainy day funds,” there is no trigger mechanism—such as an increase in unemployment – to force release of the funds; instead, reserves are available for spending at any time or for saving for a specific purpose.
- Ending balances are built up deliberately, much like a personal savings account, to set aside funds for planned events such as construction of capital projects.
- Cities build up healthy balances in anticipation of unpredictable events such as natural disasters and economic downturns.
- Bond underwriters look at reserves as an indicator of fiscal responsibility, which can increase credit ratings and decrease the costs of city debt, thereby saving the city money in annual debt service costs.
- As federal and state aid to cities has become a smaller proportion of city revenues over time, cities have become more self-reliant and are much more likely to set aside funds for emergency or other purposes.
As economic conditions made balancing city budgets more difficult in recent years, ending balances have been increasingly utilized to fill the gap. In 2011, cities reduced their ending balances to 18 percent of expenditures (compared to a projected 15.4%). In 2012, city finance officers projected ending balances at 12.7 percent of expenditures. Actual ending balances often register at higher levels than projected ending balances. However, if this projection holds, since the high point in 2007, cities will have drawn down total ending balances by nearly 50 percent (from the high of 25.2% to 2012’s 12.7%).
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