It was one of the most frequently mentioned phrases in the budget negotiations this year: Yes, we are talking about oft-cited, “fund balance.” Hang in there with us: We know it sounds wonkish and obscure, but it’s actually quite easy to understand and pretty important to know about.
So what is the “fund balance,” and why should you care about it?
Essentially the fund balance is the District’s savings account. And just like many of us have done during this tough economic downturn, the District has dipped into its savings to help make ends meet. That’s the right thing to do at this time, but the rate of depletion has raised concerns that we are draining our nest egg too much and entering a perilous financial situation. We agree that the District’s savings account needs to remain abundant and strong, but the current proposal to rebuild it may go too far, too fast and may be potentially harmful to our city’s recovery from the Great Recession.
Certainly, DC should start making plans now to rebuild our fund balance. But the proposal included as part of the Fiscal Year 2011 budget goes too far and too fast ‘ by tying up all available surplus money in the near future and building up our reserves to levels we have never seen. Moreover, much of this money will be put into a fund that cannot be touched for fiscal emergencies. In other words, we are putting every penny we do not spend into a fund that we can’t tap into for a crisis. This limits our ability to respond to ongoing budget needs at a time when the District’s finances remain fragile.
Keep in mind that nearly all states have drawn down their fund balances in response to the recent recession. DC’s fund balance, in fact, will be higher as a share of our budget at the end of 2011than in 43 states. That’s worth repeating: More than four out of five states have a lower percentage of savings compared to their operating budget than the District. These figures show that DC is doing a pretty good job managing its finances in the middle of one of the worst recessions in history.
The fund balance should reflect its name: A balanced, reasonable approach to keep the District on sound financial footing. Unfortunately, the current proposal to rebuild it is extreme and severely limits the District’s ability to responsibly manage its money.
The current proposal would create two new reserves. The first would put all surplus money into a “cash flow” fund until it reaches nine percent of our budget, or roughly $530 million. This fund would not be available for fiscal emergencies, making it essentially untouchable. This reserve would be far more than the District has ever had for these purposes. The previous maximum was $175 million.
The other fund would be an operating reserve of $120 million and could be used for fiscal emergencies, like spending pressures. But the operating reserve wouldn’t be built up until after the $530 million cash flow reserve was built up, and that could be years and years away.
Whatever financial management rules we choose today to build up our fund balance, we will very likely not be able to undo going forward without risking an unfavorable view by Wall Street. It is crucial then, that the District chooses fiscal rules it can live by. Building up reserves to over $650 million by using all future surpluses will take a number of years. It would be more prudent for the District to set-aside a smaller share of end-year surpluses ‘ such as 50 percent ‘ and to lower the total amount of reserves to be in line with more historical use. This can help ensure we remain fiscally responsible and have the flexibility to deal with our budget needs now, and in the future.
DCFPI put a paper out today that walks through DC’s fund balance, the current proposals to rebuild it, and our recommendations. To read the full report, click here.
