I have been thinking lately about the town's Stabilization and Reserve Funds. One of the recommendations in the DOR report was for the Select Board and Finance Committee to have a policy on what our reserves should be and how we will maintain that.
From the DOR report,
Recommendation 3: Develop New Reserve Policy
We recommend that Dartmouth modify its free cash guidelines and adopt a formal reserve policy that defines adequate reserve levels based on the community’s needs...
...Reserves in a municipal context typically include free cash and stabilization fund balances. A formal reserve policy should reflect a consensus among select board and finance committee members that defines target reserve levels in the context of a broader financial plan.
Putting aside for a moment the "broader financial plan", I have heard it posited that 10% of the budget is needed in reserves. I felt that was high. I thought more like 4-6% would be a good number to shoot for. Using just the $2.2 million in Stab fund, we have 3.2% of the total $68 million budget. I thought that we should try to keep 4% in the Stab fund, which means we need to fund it with an additional $500K this year.
Others have pointed out to me that the first order of business is to define what sort of eventualities we are putting this money aside to cover. Hurricane damage, blizzards, collapse of town buildings, power disruption, public water supply contamination, and other scenarios have been mentioned. In that context, a Stab Fund of $3-4 million dollars is woefully inadequate. I am not sure now what the Stab fund amount should be and that is part of what we need to decide.
Another aspect of having a larger Stab Fund balance is that the deposited money would generate revenue in dividends and interest which could then be applied to town expenses. My thought right now is that Stab Fund interest revenue could be used for capital outlays if they are in excess of what is needed to keep up the Stab Fund balance percentage.
Returning now to the "broader financial plan" that I skipped over above, it is imperative that we formulate a multi year fiscal forecast and a plan for expenditure allocation so that we can make the kinds of judgments required to form a sensible reserve policy. That forecast and plan is needed sooner than later and our administrators need to produce it for comment and review at the earliest opportunity.
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9 comments:
What is a normal reserve for a community like ours, not excess but just right?
Frankg has done a bit of research and found this statewide
Reserve data is harder to get but the mean (n=358) for 2008, using 2007 numbers for the Stab across the state is 4.99%. The stdev is 5.9%, so it is all over the place. The median is 3.6%. Some of the communities show 0 for the Stab so one always has to question the DOR data a bit. They tend to show a 0 instead of an empty cell, but I think the numbers are close enough for discussion and goals.
Just remember that the numbers are based on the levy, not the budget, which seems to be the preferred way for the state to calculate. I guess that is because it is "firm" money, and of course the budget is always higher than the levy so the percentages would be lower if done that way.
Since I show the 2008 total levy as $40,174,259, that would put the Stab limit at $4,017,425 annually, and the Reserve at $2,008,712. I think $3M for the Stab and $1M for the Reserve would be a nice short-term goal, and help our bond/Moody's rating.
Here and here are the applicable guidelines from the DOR. Bold edit mine in frankg's comments. The Stab Fund limit is 10% of the valuation of the taxable real property, a big number.
I think a 5-6% figure with maybe 3/4 of a million of that in the reserve would be a good target long term. 10% seems awfully high and if a huge catastophe were to hit it would likely be much more than 10% anyway (think hurricane of large proportions - you'd go thru $5-6 million easily) I'd rather have 5-6% held and should a truly catastrophic event occur we'd have to come to the voters and the feds to cover anything over our stab fund. Why sit on so much more of our money than we have too?
Thanks for the answer-someone needs to discuss this with Fin Com cause many want stab at 6 million+ and reserve at 1 mil. I agree, have a conservative but fair amount. Not excess when budgets are so tight.
Any news from SC mtg...Presentation on $$$ contract savings and perks? What about the parent survey discussion?
Can you do blog on pay freezes for a year? This is worth discussing.
Blog from joint meeting analysis--How does our future seem for funding all that's needed?
Blog from joint meeting analysis--How does our future seem for funding all that's needed?
It depends on what your opinion of "what's needed" is
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