Different Approaches To Handling Reserve Funds

Different Approaches To Handling Reserve Funds

Audits of government fiscal operations are typically boring stuff, but that was not the case in Berlin this week. It was an interesting review, and it’s important for town property owners to understand what was discussed.

The annual audit report raised concerns about the town’s shrinking general fund balance. Although each government handles these funds differently, in Berlin the unassigned general fund balance represents its reserves, which is a rainy day fund of sorts available for unexpected, or emergency, expenses.

In Berlin, the general fund has been reduced from a high of more than $8.3 million in 2016 (with $6.5 million unassigned, or in reserves) to about $5.2 million in the current fiscal year (with about $3.7 million in unassigned dollars). The auditor estimated the town will see its general fund dip to $3.7 million in the next fiscal year (with $2.2 million unassigned).

As a result, the auditor recommended the town approve a formal policy for its fund balance where a certain percentage of the town budget will be retained for emergency expenses. That would seem highly appropriate and it’s surprising the town doesn’t have something on the books already. Although it doesn’t have an official policy, the town has made maintaining an appropriate reserve balance a priority, albeit unofficially.

In Ocean City’s case, the stated policy is a reserve fund of 15 percent of the general fund budget. That’s standard practices for government. In Ocean City, elected officials don’t think that’s enough — current reserves sit at 22 percent, well over the stated policy. The reserve fund is too high in our opinion. It’s clear to us dollars from that fund could go into the operating budget to help maintain a constant yield tax rate in future years or even reducing the property tax rate (something government rarely does).

Clearly, the Ocean City Mayor and Council have adopted a conservative approach and want to keep that account fat in the event of a Mother Nature disaster. It’s tough to argue with that logic. However, there will come a time when the city should transfer the massive overage to address expenses. If the approved policy, recommended in government circles, is 15 percent of the general fund, there’s no reason to go above and beyond it. That’s being too cautious and an argument could be made it’s highly inappropriate for the city to be sitting on that kind of money, despite the fact it’s a beachfront resort.

In Berlin, a policy needs to be in place to steer future budget processes. To be clear, however, the town’s finances are in sound working order. Town officials simply need to formalize a policy to sustain long-term reserves. This would leave those dollars in a lock box of sorts that could not be used for capital projects and transfers to address enterprise funds, which should be self-sustaining, coming up short. It’s an appropriate practice for all governments.

The fallout from this sort of formal policy where dollars are restricted for emergencies – like the work that was needed after the major summer flooding event in Berlin in 2012 – could be significant. It will represent a general change in governance for the town and alter the way the town puts together its annual budget. Town property owners could be called on to help in the form of tax or fee increases.

Mayor Gee Williams touched on that this week, saying, “We have to decide what level of fees, what level of property taxes, will support what people desperately need or really want. That’s going to be the very interesting part of this year’s budget process.”

About The Author: Steven Green

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The writer has been with The Dispatch in various capacities since 1995, including serving as editor and publisher since 2004. His previous titles were managing editor, staff writer, sports editor, sales account manager and copy editor. Growing up in Salisbury before moving to Berlin, Green graduated from Worcester Preparatory School in 1993 and graduated from Loyola University Baltimore in 1997 with degrees in Communications (journalism concentration) and Political Science.