—What do we need all this fund balance for, anyway?—
As we move into the height of budget season for North Carolina local governments, this question will ring out from voices across the State—especially as many local governments re-build fund balance after some years of decline. So, why do we keep taxpayers’ money in the government’s bank account (if in fact, that’s how you view the issue)?
Unrestricted fund balance does more than dress up local governments’ financial statements and keep the Local Government Commission happy. Fund balance provides important cash flow coverage, allows local governments the flexibility to cover unexpected costs, and positions local governments to take advantage of unexpected opportunities.
To Provide for Cash Flow
This is the basic, and most important reason, for fund balance. Unrestricted fund balance isn’t the only source of cash on hand to meet bills, but it’s the one you can most count on. The LGC’s guideline of a minimum 8% fund balance is enough for one month’s average cash flow (and the Government Finance Officers Association recommends a minimum of a two-month supply for the general fund). One month would be sufficient if revenues and expenses came in evenly throughout the year; but, of course, revenues fluctuate, while expenses carry on relentlessly.
Beyond the routine requirements of making payroll and gassing up the vehicle fleet, there may be other cash-flow demands. Consider a locality at the beginning of a construction project — there will be a need to pay professional costs (architects and engineers, for example) before the project gets started, even if a project is ultimately going to be supported by borrowed money. There may also be payments to a contractor that have to be made up front before loan proceeds are available.
To Meet Unexpected Costs and Opportunities
Cash-flow protection is the most frequently cited reason for maintaining a healthy fund balance, but it’s not the only reason.
- Unexpected costs—We find coastal communities often have high fund balances to provide for a response to a hurricane – but there’s not a community in North Carolina that’s not at risk for some sort of natural disaster. Even if FEMA will reimburse your clean-up costs, that process can take months, and in some cases years. Even for smaller casualty losses such as fires, you may need money quickly to respond to a loss and to pay your deductibles.
- Unexpected opportunities—These could include matching funds for grants that become available, or funds to purchase land that may become available unexpectedly. Is there a school site you have your eye on, or land you need to acquire as part of a business recruitment? What if you finally have a chance to buy that downtown eyesore from the absentee landlord?
The LGC publishes a wealth of information on its website about fund balance and other financial issues—click here to go to the benchmarking tool and see how your unit compares to peer governments.
We do not want to minimize the difficulty of reconciling the local government’s fiscal needs with the tax burden on local residents, but unrestricted fund balance is more than money sitting idly for no good reason. As always, please see our disclaimer.