From millions to zero: How much should local governments hold in reserve?

From millions to zero: How much should local governments hold in reserve?

April 14th, 2013 by Tim Omarzu in Local Regional News


An informal survey shows wide variation in how much money local governments keep in savings as a percentage of budget.

Municipality // Budget // Fund balance // Percentage of budget

Chattanooga $209.32 million $45 million // 21%

Collegedale // $6.21 million // $1.71 million // 28%

East Ridge // $10.93 million // $4.92 million // 45%

Lakesite // // $898,025 // $2.39 million // 267%

Lookout Mountain, Tenn. // // $672,000 // $2.85 million // 425%

Red Bank // $4.94 million // $6.21 million // 126%

Ridgeside // $265,662 // $172,676 // 65%

Signal Mountain $6.167 million $6.4 million // 104%

Soddy-Daisy $7.19 million // $500,000 // // 7%

Walden // // $782,500 // $2.98 million // 382%

Hamilton County $221.59 million $99.01 million // 45%

Catoosa County, Ga. // $22 million // $9 million // 41%

Chattooga County, Ga. // $10.6 million // $2.75 million // 26%

Dade County, Ga. // $8.91 million // // $0 // // 0%

Walker County, Ga. // $21 million // $9.68 million // 46%

Whitfield County, Ga. // $37.25 million // $13.6 million // 37%

Source: Individual governmental bodies

How much in savings should a city or county keep in the bank?

Chattanooga-area governments vary widely in their approaches, according to an informal survey of a mix of city and county governments.

Some don't have any savings. Others have millions stashed away as a safety net, or to pay for big projects.

Both extremes have benefits and drawbacks, according to those involved.

Governments with no savings can get in trouble if a tornado or other expensive disaster strikes. Even barring a crisis, they often have to borrow money to make it through the year - which means paying interest and other fees.

Yet cash-strapped governments tend to keep taxes low, which is a top priority for many residents.

Governments with big bank accounts better can ride out disasters and pay out of pocket to get things done - but at some point, taxpayers may wonder when they're going to get a tax break as government balances grow fat.

Hard and fast rules about how much to save are hard to come by.

"There is no magic number," said Christopher Pike, finance director for Dunwoody, Ga., who teaches a local finance officer certification class for the University of Georgia's Carl Vinson Institute.

"I would argue that anything from as little as a month to as long as a year could potentially be reasonable," Pike said.

"Too little and you're being irresponsible," he said. "Too much reserve and you're hoarding past taxpayers' monies to reward future taxpayers."

Pike recently asked Georgia governments what they had as a goal for their fund balances, which is the accounting term for a municipality's savings.

He got 21 responses, ranging from St. Marys, Ga., a city on the Atlantic Coast near Florida that keeps 30 days' operating expenses in its fund balance, to Stockbridge, Ga., which has two years' reserves saved.

The average fund balance, though, held enough to cover 94.3 days of operations - just over three months' worth.

Dade borrows, Catoosa saves

Two Northwest Georgia counties are at opposite ends of the savings spectrum.

Dade County runs out of money every year and has to borrow to make ends meet.

Nearby Catoosa County has $12 million in savings and can pay out of pocket for such expenses as installing a generator at a defunct county landfill that converts landfill gas into revenue-producing electricity.

So which approach is best?

Dade County Chief Financial Officer Don Townsend can tick off the problems with not having a fund balance.

"Ours is zero," Townsend said. "I know that sounds ridiculous, but it's just the way it is."

Employees haven't had a raise for six years, Townsend said, and positions have been cut. The county has had to borrow money - and pay interest on it - for the last several years, he said, and likely will this year, too.

"We have to pay that note off," Townsend said. "It's a vicious cycle."

Though at today's interest rates, financing doesn't bite too hard. Dade County tapped $750,000 last year with tax anticipation notes through the Bank of Dade. Interest on that cost $4,196.

And taxpayers may not mind that Dade County is tight for cash, because the County Commission keeps cutting property taxes.

"We've had two decreases in the last three years in our millage rate," Townsend said.

Catoosa County used to be without a reserve, too - until Chief Financial Director Carl Henson came on board a decade ago and worked to build one.

"Ten years ago, it was no reserve," Henson said. "Over that period of time we've been able to build the reserve up."

Now Catoosa has a general fund reserve of $12 million. Of that, $3 million is earmarked for such things as employees' sick pay, leaving an unassigned fund balance of $9 million - about 40 percent of the county's $22 million annual budget, or enough to cover five months' operations.

Catoosa County has tapped its savings to cover such expenses as paying the local match required to get state and federal cleanup funds after the April 2011 tornadoes hit - something that other area counties had to borrow for.

"They had to borrow money to pay for the cleanup - which we didn't have to do," Henson said.

Big fund balances have their critics. Chattooga County, Ga., Sole Commissioner Jason Winters thinks it's possible to have too much of a good thing.

"If you're sitting on a ton of money, either you're bringing in too much from utilities, or your taxes are too high," Winters said.

Chattooga County's fund balance is about $2.8 million, or 25 percent of its $10.6 million annual budget.

Other factors

Lakesite, Tenn., has one of the healthiest fund balances around, with about $2.4 million in the bank - almost three times its annual budget of $898,000.

But the bedroom community in northern Hamilton County on Chickamauga Lake isn't just squirreling money away for the sake of doing so - city officials figure they'll need the money to install a sewer system because all the residents are on septic systems now.

"We're accumulating funds for capital improvements, primarily sewer," City Manager David Edwards said.

Lakesite has a long-standing tradition of saving money to make purchases, said Edwards, a University of Tennessee at Chattanooga political science professor who has been city manager since 1992.

The only time Lakesite borrowed money was to build its city hall, he said, and it paid that loan off early.

"I don't see any downside to it," he said of building up a fund balance. "Our taxes are the least in Hamilton County, and we have a plan to use the reserves."

The Town Council of Signal Mountain officially decided in 2011 to maintain a fund balance of 35 percent, Town Manager Honna Rogers said. It currently has much more than that: $5.2 million in unassigned funds plus about $1.2 million in dedicated reserves, including $500,000 for a fire hall.

Rogers' personal philosophy is to keep a fund reserve to cover six months' operations.

"You don't know what could happen," she said.

Big balances mitigate risk

Another factor in the size of a fund balance, Pike said, is a government's willingness to accept different levels of risk.

"Think about a sinkhole. Some communities may be willing to allow a metal plate to stay over that sinkhole for months or a year, while others want it fixed immediately," Pike said.

He cautioned, "People's acceptance changes once an event takes place that affects them. Then the cry goes from 'lower my taxes' to 'why weren't you prepared for this?'"

Imagine, Pike said, if Cleveland and Chattanooga had identical playgrounds worth $5 million that were destroyed by a tornado.

"For this illustration, we'll ignore insurance," Pike said. "Both cities will need to come up with $5 million to rebuild the parks. Chattanooga has over $200 million, and the $5 million would not as severely disrupt the budget as it would for Cleveland."

"Cities with smaller budgets actually need a higher percentage going to reserves than those with larger budgets," Pike said.

The Chicago-based Government Finance Officers Association recommends that a government keep at least two months' operating revenue in its fund balance.

"There's a lot of caveats to it," said association spokesman John Fishbein, referring to such factors as the predictability of a government's revenues and the chance of natural disasters or state budget cuts.

Both Pike and the Government Finance Officers Association recommend that governments pick a reasonable amount and stick with it.

"Each government is different," Fishbein said. "It's very hard to have a one-size-fits-all."

Staff writer Kendi Anderson contributed to this report.

Contact staff writer Tim Omarzu at or 423-757-6651.