Austin leery of using reserves

Published 10:01 am Friday, June 12, 2009

They’re often called rainy day funds. Other times they’re called reserves. No matter the title, Gov. Tim Pawlenty is calling on cities to dip into them given almost certain Local Government Aid cuts — an idea that’s not being well received in Austin.

What’s being discussed are fund balances, money that is separate from a city’s general operating funds. Fund balances are broken down into reserved funds, which are tied up with some project, and unreserved funds, which can be designated for something or simply extra cash. It is the unreserved section in cities’ general funds and special revenue funds that the state auditor says should be at 35 to 50 percent of operating revenues, and it is this section that Austin officials are leery of using, despite the governor’s recommendation.

The most recent data on Austin’s unreserved fund balance puts it at roughly 39 percent, something city administrator Jim Hurm said he’s proud of and something that former state auditor Patricia Anderson commended the city on in the past via letter. But now with Pawlenty recommending that cities use reserve funds to mitigate LGA cuts, Hurm said he thinks he’s receiving a bit of a mixed message.

Email newsletter signup

“Tell me what we’re doing wrong,” Hurm said. “It’s called good financial management, and we do that.”

Hurm said he thinks the state should be encouraging long-term planning, and taking from the fund balance doesn’t fit that, he said.

Austin Administrative Services Director Tom Dankert agreed with Hurm.

He said it is sound for the city to be in that 35 to 50 percent range, and said it might be wise to go even higher than that.

“We’ve practiced sound fiscal management for many years,” he said.

Hurm and Dankert said they aren’t sure exactly what the governor wants them to do — like using a particular amount of reserves, or bringing the percentage down to a certain number — another issue that has them concerned.

“I don’t know what (Gov. Pawlenty) is saying,” Hurm said.

On behalf of the governor, Pawlenty spokesman Alex Carey said in an e-mail that cities should use “sound judgment” when using reserve funds, but did not mention any particular numbers. He added that it’s “reasonable for (cities) to consider the recommendations of the state auditor and others.”

While Minnesota State Auditor Rebecca Otto said the 35 to 50 percent range is a good goal, it ultimately comes down to each city to properly manage fund balances.

“It’s about prudent fiscal management,” she said. “There’s no magic bullet for all.”

She said cities have to weigh what kind of revenue sources they have, as well as if there is anything they need to save up for, when deciding how to approach fund balances.

Otto also said there is a degree of “over simplification” being done by the state. While the governor is calling for cities to use fund balances, Otto said it is important to note the differences between a city’s reserves and the state’s.

Because cities receive the bulk of their revenue twice a year — when state aid and property taxes are distributed — reserve funds can help provide cash flow in between, one reason why cities are recommended to maintain strong fund balances.

The state, on the other hand, operates a bit differently, Otto said. Because Minnesota has strong and more frequent revenue sources, the state’s reserve is better suited for emergency use and can be drained when needed. That’s the case now — Carey said the state has no budget reserve.

Because of those differences, Otto said a city can’t be asked to drain a reserve fund. She also said it’s unfortunate that bad fiscal management on the state’s part can hurt cities who may be doing good jobs. She likened the situation to the state catching a cold and cities catching pneumonia.

“(The state) keeps running into the same problems over and over. Deficit after deficit after deficit,” Otto said. “It gets old.”

Rachel Walker, policy analysis manager at the League of Minnesota Cities, said LGA cuts and potential unallotments are concerning for city budgets.

The league does not take a particular stance on what an appropriate fund balance is — Walker said the league serves as an informative, advisory body — nor does the league comment on particular cities. However, Walker said it’s concerning to see cities turning to fund balances.

“We are just concerned with cities’ ability to absorb cuts,” she said.

That is of course a concern to Hurm, Dankert and other Austin officials as well, and will become more crystallized when Pawlenty announces his unallotment plan, expected by the end of the month. Whatever the final numbers are, Hurm said he’s not looking forward to dealing with the state’s cuts.

“They’re passing on the problems to the local level,” he said.