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Sunday, February 22, 2009

Dunning Misunderstands the Need for Local Agencies to Maintain Reserves

The Vanguard has all but stopped responding to Bob Dunning columns from the Enterprise, but his column from Friday is so outrageous, irresponsible, and most importantly just plain ignorant it would be irresponsible not to respond.

The title of the column is "It's Time We Let Go of Our Reservations."

He writes:
"SURPLUS SPENDING - as the economy - locally, nationally, globally (take your pick) - continues to fall off the cliff, it was encouraging to me to intercept an e-mail from Councilman Steve Souza to a local resident bragging about how fat and sassy we are in the City of All Things Right and Relevant - noted Souza: 'Almost all of the cities around us would love to have our financial woes instead of their own. We have a 15.2 percent or $5.35 million reserve.' - wow, 5 million here and 5 million there and pretty soon you have a billion -

But, as nice as a reserve is - and I don't care if we're talking about the city of Davis or the local school district - when you start talking about laying people off instead of dipping into the reserve, your priorities are backward - if we're saving our reserve for a rainy day, I'd like to point out that today is that rainy day - it has arrived - anything we can do to preserve the jobs of city and district employees should be priority one - laying anyone off for fiscal reasons when we have a healthy reserve is contrary to what this town should stand for..."
The first question that comes to mind is whether Mr. Dunning ever does research on his columns, would he like talk to the finance directors from either the school district or the city and ask them about their reserves? Would he talk to Souza himself to ask him about his email?

Here's the best explanation of the city's reserve:
"The City maintains a “reserve” much like an individual or household would keep a savings account accessible for an emergency. The City Council has adopted a policy to have a General Fund reserve equal to 15% of the City’s General Fund revenues. This is a contingency reserve for general operations to help mitigate the effects of unanticipated situations such as recession, man-made or natural disasters, variances in financial forecasting, or costs imposed by other governmental agencies. The City does not use the reserve to fund ongoing services..."
Basically the way you maintain a reserve is you pretend like the money does not exist unless such an emergency situation arises. One reason for that is that city's in general cannot take on debt like the federal government can. So if an actual emergency came up, and the city spend its reserve on say employee salaries, then the city would be in deep trouble.

The city developed this reserve policy back in 2006. According to policy, the reserve acts as a "risk management" tool, it provides a buffer against revenue fluctuations inherent in economic cycles, and most importantly the policy prohibits the use of reserve funds for ongoing operating expenditures.

The key to remember is that the reserve is one-time money. Once you use it, the money is gone.

Dunning's column mentions the school district as well. School districts are required by Ed Code to maintain a fund balance reserve every year. That money cannot be touched at all without severe consequences. The district generally maintains its own reserve above and beyond that much the same way as the City does as a risk management tool and a protection against fluctuations and emergency situations.

In the late 1980s, an increasing number of school districts were facing fiscal insolvency. Laws were enacted that created budget standards and increased fiscal oversight for all local education agencies. One of these standards was that local school districts set aside a certain percentage of their budget as a reserve for economic uncertainties. This reserve provides a cushion against unanticipated fiscal needs that may arise and thus reduces the risk of fiscal insolvency and the associated need to borrow and increase district debt.

Failing to meet the reserve requirement does not have a mandated consequence, however, as we know from other discussions, the County Office of Education oversees the finances of all local school districts. If DJUSD were to eat into its required reserve it would increase the likelihood the county superintendent of education intervening into local school district affairs.

DJUSD carried the state-required 3 percent financial reserve, which is just over $2.1 million. However, they cannot touch that reserve. The district also carries its own one percent contingency reserve which comes to about $650,000.

Interestingly enough, the district discussed this very issue on Thursday and the Davis Enterprise covered it in this morning's paper.

Given the fiscal situation in the state, districts are being given greater flexibility with some of these reserves.

But a key point with these reserves is that they are one-time monies. They will get depleted rather quickly given the nature of the economic crisis. As Bruce Colby put it, last year was a crisis, this year is a crisis, 2010-11 will be a crisis, 2011-12 could be a crisis.

Moreover, in general one has to balance the three-year budget using ongoing revenues, not one-time monies.

As Tim Taylor put it:
"From my perspective, you would spend it in a situation where you have an emergency need, something that would not commit you to ongoing year-after-year obligations."
Bottom line here is that using reserves is not going to solve our fiscal problems, and it could make them worse as time goes on. Bob Dunning needs a better understanding of the fiscal policies, rules, regulations, and economic crisis before he makes such irresponsible statements.

Getting back to his column, there is another key point that needs to be addressed.

Here he quotes Councilmember Stephen Souza:
"Almost all of the cities around us would love to have our financial woes instead of their own. We have a 15.2 percent or $5.35 million reserve."
Davis is in better condition that a lot of other cities but it has very little to do with the reserve. I would and have argued that our fiscal policies are just as bad as many other cities--if not worse. And we are going to have to deal with that. Having that reserve just means we can weather an immediate crisis better than other cities. We still have an ongoing structural deficit. We still have an ongoing problem of unmet needs. We still need to fix our unfunded mandates. We still have to fix the pension system. We still have to reign in employee salaries at the top end of the scale.

However, the bottom line is the city of Davis has been hit less hard than other cities with the foreclosure crisis. It has been hit less hard than other cities because its property values have not plummeted as others have. We rely less on sales tax revenues than other cities as well, so while the declining economy is producing a tax revenue fall off, it is not to the point where cities like Roseville who are facing eight figure budget deficits.

The bottom line is that while we have a deficit for the next few years of at least 3 million and as much as five million (and notice if we used the reserves to fix that, they'd be gone after next year), we can probably survive short term by adjusting our spending and tightening our belts.

That is not to suggest that we do not have bigger issues. It is just to suggest at this point the economic crisis is not devastating us like it is many other cities or even Yolo County.

So yes, Councilmember Souza has good reason to express optimism, but it is not because of our reserves. Our reserves would be depleted very quickly in this crisis, if that was their intent.

Dunning has a large amount of influence in this community and his column is undoubtedly the most widely read feature in the Davis Enterprise. With that influence requires a degree of responsibility to research and understand the issues on which he has opined. In this regard, he has failed in his duties by suggesting the city or the school district are being irresponsible by maintaining fund reserves. In both cases, maintaining reserves is either required by law, required by city policy, and necessary and prudent for these entities to whether the uncertainty of such a downturn. It would be the height of irresponsibility for them to use these reserves in an effort to avoid making tough decisions in the coming year.

---David M. Greenwald reporting