The Town of Ocean City has too much money in reserves based on its own policy. The numbers confirm the town’s fund balance carries more money than the norm, but what to do with the excess dollars is the question.
The majority of the Mayor and Council, armed with support from the city’s finance staff, favors growing the town’s reserve fund to ensure it can sustain the city if a major natural disaster occurs. While that’s laudable to a degree, the city also dips into the fund to pay for smaller projects like street paving and canal dredging that can be accounted for without going to the bond market.
How much money to retain in a reserve fund is generally up to the individual municipalities. In Berlin’s case, the lack of a policy led to the town being in dire straits the last couple years. It was reported last year the town only had a couple months’ worth of operating expenses in reserves at that time. Tax increases have been in store for residents to boost the town’s fund balance if disaster strikes. The exact opposite seems to be true seven miles to the east.
Ocean City currently has a reserve fund of approximately $7.3 million, which is approximately 23% of the town’s general fund balance. For many years, the city’s policy was to retain at least 15% of its general fund balance in reserves. After recent strategic planning sessions and observing what occurred at other coastal areas devastated by storms, the city decided to elevate its reserve fund policy to 20%.
According to the Government Finance Officers Association, at least two months of operating expenses should be held in a reserve account for government, However, the GFOA writes, “The adequacy of unrestricted fund balance in the general fund should take into account each government’s own unique circumstances. For example, governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in the unrestricted fund balance. Articulating these risks in a fund balance policy makes it easier to explain to stakeholders the rationale for a seemingly higher than normal level of fund balance that protects taxpayers and employees from unexpected changes in financial condition.”
Due to its coastal vulnerabilities, we believe Ocean City is right to retain more funds in its reserve fund than other towns. We supported the decision to increase the fund level from 15% to 20%, but we oppose retaining anything behind that. In the next budget cycle, the city needs to get its reserve fund down to the 20% threshold. Officials should return the extra funding to the taxpayers or at the least earmark the funds for capital projects looming in the future.
What would be unacceptable is for the town to continue to grow the reserve fund annually as it’s doing currently. Maintaining a healthy fund balance should always be the goal, but the town’s current level is not appropriate. The fund should not exceed 20% on an annual basis. If the council can agree on that, which is not a given, a deeper dive into how to allocate the extra dollars will be required. Given the nature of the current council, the conversation will be spirited.