OCEAN CITY- A divided council this week did not approve a proposal to increase the town’s reserve fund balance from 15% to 20%, but not necessarily because the majority was opposed to the measure.
The Mayor and Council had before them on Tuesday a proposal to increase the town’s general fund reserve balance from the current policy, or goal, of 15% to 20%. The unassigned reserve balance represents a percentage of the overall general fund budget, or a rainy day fund of sorts in the event of an emergency, or other unanticipated expenses.
It can, and has in the past, been used to cover increases in expenses in the general budget. In other cases, fund balance can be used to offset the cost of certain pay-as-you-go projects. On Tuesday, Finance Director Chuck Bireley and Budget Manager Jennie Knapp presented a proposal to increase the reserve fund balance from 15% to 20%. After a considerable debate, a divided council voted to not approve the measure at this time, but rather to revisit the issue at budget time.
On the surface, the issue appears somewhat moot. The town’s fund balance at the close of fiscal year 2021 was nearly $29 million, or 37% of the general fund budget. The amount needed for a fund balance reserve of 15% would be around $13 million, while increasing it to 20% would require roughly $17 million. Bireley said increasing the policy, or goal, to 20% made sense now given the town’s healthy financial situation.
“We feel like we have enough reserves to do this and still have the flexibility,” he said. “We know at this point what we might need fund balance for. Just using the capital improvement plan as an example, typically we would use part of fund balance each year for some of that. We don’t know what that amount is at this time. We feel like going to 20% now is somewhat conservative and doable and still allows us flexibility going forward.”
Councilman John Gehrig said he did not oppose changing the policy. However, he questioned to the timing of the request with fiscal year 2023 budget sessions still at least two months out. He pointed to potential impacts on the town’s lofty credit ratings, if the percentages were changed.
“I certainly support the move,” he said. “There are reasons we haven’t done this in the past. With the credit ratings, because we’re a resort town, we’re really not likely to get to a AAA. I know we’re going to have some big asks in the budget. I just think this is premature. I think this might be better as part of the budget process and we see what we have going on and make sure we don’t have any unintended consequences.”
Knapp explained changing the stated policy from 15% to 20% was merely a framework and not a requirement.
“This would be a goal,” she said. “It’s not a requirement. The requirement is that we bring you a balanced budget. If we were going to use fund balance to balance the budget, then we would probably have to make sure that we had 20% remaining. I really don’t think that would be a problem. We wouldn’t bring this to you if we didn’t feel comfortable.”
Councilman Mark Paddack said he felt as if the request had come out of the blue.
“Where did this come from?” he said. “We’ve kept a steady tax rate for 10 years. We’ve been able to work reasonably to minimize expenses, cut expenses and now we have this reserve with extra money.”
Paddack said the town at some point might need that healthy reserve balance in an emergency and raised concern about encumbering it with a higher reserve policy percentage.
“I looked at our capital improvement plan with multiple expensive projects that need to be completed,” he said. “I get going from 15% to 20%, but what if we get hit with a hurricane? We’re going to have the cash and we’re going to get the contractors in here to get this town up and running.”
Again, Bireley explained the policy was simply a goal and not a requirement.
“Changing this tonight does not lock it in to the point it can never be changed,” he said. “You can always vote to change it back, or to some other number. It’s just a guideline.”
Knapp said with fund balance currently at 37%, the timing could be right to adjust the policy.
“We’ve talked about changing it above the 15% for a long time,” she said. “We’ve talked about doing it all at once, and we’ve talked about doing it incrementally. We felt this was the time we could comfortably take it to 20%.”
Council members appeared not to oppose the idea but said it was better to wait until budget time.
“This has been the unofficial policy of the council even before I was on the council,” said Council President Matt James. “I remember discussing at strategic planning about bringing it up to 20%. I support it, but I’m also fine if the council wants to hold off until budget time.”
Gehrig continued to push for holding off on the decision.
“It’s been the unofficial goal and we’ve been achieving that goal all these years,” he said. “I don’t know why we need to make it official right now. I don’t think anybody is against it. Let’s just look at all of the numbers and see what we’re going to need for fiscal year 2023 and beyond.”
In the end, the motion failed with Council Secretary Tony DeLuca, and Councilmen Lloyd Martin and Frank Knight in favor of making the change on Tuesday. James, Gehrig, Paddack and Councilman Peter Buas voted against the increase.
