Unified Government staff members on Monday evening called for larger financial reserves.
According to Kathleen VonAchen, UG chief financial officer, it would be advisable for the UG to have three months of general fund reserves as compared to its current two months of reserves. Her presentation was Monday evening to a UG committee.
The strengthening of reserves was just one of many proposed revisions to the UG’s financial planning policies. There was no vote Monday; the topic will come back to future UG meetings for more discussions.
On Monday, when the Dow Jones index dropped more than 1,100 points, the Unified Government Economic Development and Finance Committee was advised to increase the UG’s financial reserves. The timing of the UG financial report on Monday night was coincidental with the day’s market drop. The report had been scheduled for several days before Monday’s decline. Friday’s Dow Jones index had decreased more than 600 points, and Tuesday’s Dow Jones index increased more than 500 points.
Commissioner Jim Walters said he favored not increasing reserves, and using surpluses to spend down the UG’s debt.
“My priorities are reducing debts and reducing taxes,” he said. He added last year the UG reached its reserve levels.
VonAchen said most of the changes outlined in the policy were already in practice by the UG. She said increasing reserves would probably improve the UG’s credit rating. Improving the credit rating could lead to savings on interest costs, she said. The UG’s credit rating with Standard and Poor’s has remained at AA through the past several years, but Moody’s downgraded the rating to A1 in 2015, according to VonAchen. The UG had lowered its reserves around the time of the recession about 10 years ago. It has made an effort to increase reserves over the past few years.
If the UG can get the rating increased to AA, the UG’s general obligation bonds would cost 2.85 percent instead of the 3.35 percent expected this week, she added. It would save an estimated $1.25 million over 20 years, or about $312,000 per year, she added.
Higher reserves also would protect against any disasters that could hit the economy or the community, she said. She outlined possible risks to UG finances.
More reserves would generate interest income to pay for additional street maintenance, public safety equipment and economic development, she said. She does not favor paying for some operating expenses with bonds, she added. Higher reserves also would avoid some interest expense from issuing bonds for various expenses.
The current fund balance is about 17 percent of expenditures, about two months, she said. She recommended gradually raising the reserve level, over a period of five years, to add $16 million, a reserve that would cover one more month, to bring the total to three months of expenses. The Government Finance Officers Association guidelines for a community this size recommends a 26 to 35 percent fund balance, and VonAchen said she is recommending 25 percent.
VonAchen added that the UG currently is doing very well from the financial operations standpoint. She said this will be the commission’s decision, and it may be discussed over the next few months.
“This is a little bit too cautious for my taste,” Commissioner Walters said. “At the end of the day we’re telling our citizens that we cannot give them tax relief because we need their money in our bank account in case something happens. That’s the exact discussion we had last time, I proposed a mill levy reduction instead of adding to our reserves.”
He added he didn’t like the idea of increasing reserve levels to pay off debt, and he would rather have less debt.
VonAchen at the meeting said it was possible to increase the reserves, reduce the debt load and reduce taxes at the same time.
Commissioner Tom Burroughs was in favor of flexibility in being able to use the reserve funds. He said he was concerned the UG wouldn’t tie its hands with building up reserves and then not reaching the criteria to use them, instead needing additional funding. He didn’t want to see the UG go out and bond more, he added.
Commissioner Gayle Townsend said the lengthy items covered in the financial planning topic were more than could be addressed at this time, and she preferred to wait until March at the budget retreat or after to vote on it.
To hear more discussion from this meeting, including more revisions on other financial policies, the meeting is online at https://www.youtube.com/watch?v=AgrpHgJrxqA.