Hello District Dime readers, and welcome to our post-Labor Day blog!
This is a time when we turn away from the carefree days and thoughts of August (Hmmm, for us that meant writing about out-of-state municipal bonds) and make a return to more serious matters like the District’s fund balance. You might not have noticed, but over the last few weeks there’s been some debate about what DC should do about this part of our budget. This week, the District’s Dime will help you understand exactly what the fund balance is, how we have used it, and what we should do with it moving forward.
What is the fund balance and why should you care about it?
You can think of the fund balance as the District’s savings account. It holds our emergency and contingency reserves, which are not-so-technically known as our “rainy day funds”; escrow funds to pay back the city’s bond payments; dedicated taxes for certain budget priorities; and any end of year surplus that is left in the city’s general fund after the bills have been paid. So how much is in there right now? At the close of our last fiscal year, FY 2010, DC had $890 million in its fund balance, which is roughly 15 percent of the FY 2010 budget. The balance will be somewhat lower as of the end of FY 2011 — which ends on September 30 — but the exact amount won’t be known for months until an audit is completed.
A healthy fund balance also is an important fiscal tool because it is used to provide “working capital,” or funds that can be used to help pay the city’s operating expenses when revenues don’t come into DC’s coffers at the same time that certain bills are due. A stable supply of working capital helps avoid the need for short-term borrowing.
What does it mean to have a healthy fund balance?
That’s a good question. As we noted above, the fund balance is an important financial tool for states not only because it holds funds to repay bondholders and reserves, but it provides needed monies so that when taxes don’t come in at the same time bills are due the District can pay them without putting the budget out of whack. That is why the fund balance is often used as a common measure of a city or state’s fiscal health.
Nearly all cities and states total fund balance levels dropped during the great recession, and DC is no exception. States, including DC, had saved during good times and used those savings to help cushion the blow to state coffers during the bad times. This allowed many states, including DC, to weather the storm and maintain their investments in schools, libraries and roads as well as help meet the rising needs of families.
As noted, DC’s fund balance at the end of FY 2010 equaled 15 percent of our city’s local budget. That percentage is better than 42 of the 50 states, according to the National Association of State Budget Officers. Some city officials now are concerned that our fund balance has gotten too low, and that we need to designate funds to build it back up. There’s no dispute we need to maintain a healthy fund balance. How much money we put toward that goal — and how fast ‘ are the key questions. But before we get to the how we build it up and when, the District’s Dime will first explore how DC has used our fund balance. Stay tuned tomorrow for the details.
