By Shawn Hunstock, CPA
City of Edmonds Finance Director
A recent My Edmonds News article — Edmonds City Council changes reserve policy; catastrophic reserve disappear — and subsequent comments posted online contained statements that could lead to an inaccurate understanding of the new reserve policy.
The City Council’s Finance Committee considered at their Dec. 13, 2011 meeting a draft reserve policy. The policy was reviewed and the consensus at the time was that the draft policy was needlessly overcomplicated by setting up a few different types of reserve funds, each for different purposes. The draft policy was set aside for several months as Finance Department staff worked on completing the overdue audit for 2010 as well as the 2011 audit.
At the July 10, 2012 Finance Committee meeting a revised draft reserve policy was brought forth for consideration. The revised policy proposed creation of one overall reserve fund with a target of 16 percent of annual general fund revenue, as well as a smaller reserve fund of 2 percent of annual general fund revenue to be used for claims and litigation. The Finance Committee heard public testimony during that meeting and agreed unanimously to forward the policy to the full City Council with a recommendation to approve.
At the July 17 City Council meeting, the reserve policy was discussed by the full Council. During the presentation, it was explained that the new policy would consolidate the $1.9 million from the Emergency Financial Reserve Fund and the $1.3 million from the sale of fire department equipment into a new single reserve fund. It was also mentioned during that discussion that when the budget amendment is presented to Council to implement the new reserve policy (the budget amendment is scheduled for the Aug. 21 City Council meeting as a discussion item), the proposal will be to also move approximately $2 million from the City’s General Fund to fully fund the reserve at the 16 percent target, for a total of $5.2 million.
At no time during the discussion of the City’s reserves on July 17 was it mentioned that the current reserves were insufficient. Rather, it was pointed out to Council that the reserves were kept in two different funds and a portion of a third fund. Consolidating reserves into a single fund makes the accounting and financial reporting for them more transparent than the previous practice of maintaining them in three different funds.
The article on My Edmonds News mentioned that the catastrophic reserves would “disappear.” This is an inaccurate characterization of what the budget amendment for Council’s consideration on August 21st would accomplish. As previously mentioned, the reserve policy approved by Council on July 17 simply moves what is in the $1.9 million “catastrophic reserve” into the new Contingency Reserve Fund. The $1.3 million from the sale of fire assets is also proposed to be moved into the new fund, as well as $2 million from the General Fund in order to fully fund the reserve fund at the 16 percent target.
The article and subsequent comments also mention a “quiet policy change” and alleged “lack of discussion and disclosure.” The reserve policy was discussed at two separate Finance Committee meetings, both public meetings of course at which public comments were taken. The reserve policy was also discussed at the July 17 City Council meeting, during which citizens had the opportunity to make public comments. There was no “lack of discussion and disclosure.” A citizen also asked recently if the reserve policy was discussed at an executive session. The reserve policy is not an eligible topic for discussion at an executive session under the Revised Code of Washington. There was also no need to discuss the policy outside of a public meeting. As outlined above the policy was considered at three separate public meetings at which citizens had the opportunity to provide comments.
The article also mentions a change in calculation of fund balance for the City. It is correct that Edmonds and all other cities across the nation were required to implement a new accounting standard for the 2011 financial statements. The new standard, Governmental Accounting Standards Board Statement 54, requires cities to include in the General Fund all other funds that do not have legally or externally restricted revenue sources. The new definition of fund balance for the General Fund could be higher or lower than what Edmonds previously reported as “fund balance,” but was actually a different calculation based on cash liquidity.
Implementation of the new accounting standard, however, is irrelevant in the context of the reserve policy because the reserve target of 16 percent is calculated based on total revenue in the General Fund, not on fund balance. The 16-percent target is a minimum target identified by the Government Finance Officers Association as being a best practice for cities. If the City Council feels the $5.2 million set aside to meet the 16 percent target is not enough, the Council can simply increase the reserve beyond the $5.2 million. This is unlikely to happen at a time when the City will more than likely have to make significant cuts in order to balance the budget for 2013. In future years, though, when the economy might be better, the Council could decide to increase cash reserves beyond the $5.2 million.
The $9,562,638 mentioned in the article as city “reserves” is not the city’s reserves but rather an accumulation of that plus other fund balances in several additional funds. The $9,562,638 mentioned will not change as a result of the new reserve policy and the budget amendment to be considered by Council on Aug. 21. Instead, it will decrease the number of funds used to account for the $9,562,638 by virtue of the reserves being accounted for in one fund rather than three separate funds.
The suggestion in the article that consolidation of the reserves into one fund would make it easier to spend the money is inaccurate. It will be no easier or harder under the new policy to make use of the reserves. All that would have been necessary in the past to spend the “catastrophic reserve” was a majority vote of the Council to change or remove the restrictions in place then appropriate the money for any purpose desired. The previous restrictions did not make the catastrophic reserve money “untouchable.”
What would be necessary now under the new policy, and is no different than under the old catastrophic reserve policy, is an appropriation by Council to spend or move the reserve money. An appropriation can only occur at a City Council meeting either as part of the adoption of a budget, during which a public hearing is required, or as part of a budget amendment, during which citizens can make public comments. The suggestion that this could happen in secret or without transparency ignores the reality of what Council would be required to do under the laws of the state and according to city code.
The suggestion by a commentor that the city was about to “raid” the reserves is without merit and not based on facts. There has been no appropriation to spend the reserves and no such appropriation is being considered. Without an appropriation by Council, which can only happen at a City Council meeting, the reserve money simply stays where it is and accrues investment income over time. Although deep cuts are likely in order to balance the 2013 budget, the proposed budget the Mayor will present to Council in October will be balanced without the use of reserves.
Citizens are encouraged to contact me at email@example.com if there are questions about this article or any other questions pertaining to the budget or City finances.