by Len Wood

The following is a preview of one of the topics to be covered during the Leadership Training Institute seminars at the Congress of Cities and Exposition in Reno, Nev., Dec. 5-9.

One of the most common questions asked by those concerned with local government finance is: ?What is an adequate general fund balance??

Before addressing this question, it?s important to dispel the following three fund myths.

? Myth 1: The general fund balance is the same as the available cash balance.

While the general fund balance includes cash, it also contains other items such as notes and loans receivable, inventories, prepaid expenses and encumbrances. Many of these items are not available for spending.

? Myth 2: The general fund balance is the difference between revenues and expenditures for the year.

The general fund balance is cumulative. It includes balances or deficits from previous years. A current general fund balance is the result of the cumulative financial decisions made by elected bodies since the agency was created.

? Myth 3: The total general fund balance is a good measure of an agency?s fiscal health.

This is not necessarily true. What may look like a healthy general fund balance may consist of restricted resources with little available cash.

Local governments divide the general fund balance into two categories ? reserved fund balance and unreserved fund balance. Reserved fund balance consists of those assets that are not available for spending, already spent or legally restricted. The unreserved fund balance consists of those funds that are not restricted and are available for spending.

However, even if an agency has a large unrestricted fund balance, that alone is not a guarantee that the agency is in satisfactory financial condition. One must look at government-wide financial statements to make that determination.

When comparing an agency?s fund balance with that of other agencies, it?s important to compare apples to apples. If an agency uses an unreserved fund balance as a benchmark for comparisons, it should make sure comparative agencies are using the same benchmark and not total fund balance.

Many local governments have formal fund balance policies that have been mandated by state law, established by charter or fixed by ordinance, resolution or decree. Governing board members should determine what those policies are.

Different approaches are used to establish a fund balance level. Approaches include establishing an amount equivalent to a:

? Percentage of annual operating expenditures;

? Percentage of annual operating revenues;

? Fixed number of months of operating expenses;

? Fixed amount such as $25 million; or

? Per capita amount such as $150 per capita.

The first two are the most common approaches.

As for choosing the appropriate fund balance level, a good starting point is a recommendation from the Government Finance Officers Association. It recommends as a minimum, local governments, regardless of size, maintain a minimum unreserved general fund balance level of 5 percent to 15 percent of general operating revenues if a local government compares unreserved fund balance to revenues. If a local government compares unreserved fund balance to expenditures, the recommended level is 8 percent to 17 percent of regular general fund operating expenditures.

Again, these are minimums. Obviously you do not want to carry too much or too little. The following are some questions to help establish the appropriate fund balance level.

? Cash Flow: Does the agency have enough money in fund balance to take care of cash flow needs?

? Revenue Volatility: Is the revenue base vulnerable to severe economic fluctuation? Is sufficient money available to survive downward swings?

? Lawsuits: What is the agency?s vulnerability to adverse legal judgments? Some agencies attract more lawsuits due to the services they provide (i.e. transit) or the approaches they use (i.e. restrictive land use policies).

? Insurance Coverage: Does the agency have sufficient insurance coverage? If self-insured, are reserves sufficient to handle all open claims?

? Natural Disasters: For what natural disasters must the agency prepare? Are sufficient resources available to make emergency expenditures before state or federal assistance is provided?

? Grant And Non-Recurring Revenue Source Dependency: To what degree is the agency dependent on one-time sources? Some local governments are very dependent on federal and state grants for ongoing services. Ideally, sufficient funds should be accumulated in balances to carry these programs one fiscal year.

? Ability To Borrow: Can the agency borrow money at acceptable rates if disaster strikes or a recession hits? While the agency may be able to borrow, it may be required to pay a premium at that time.

? Bond Rating: Can the agency improve its bond rating by increasing its unreserved general fund balance?

Public acceptance is perhaps the most important governor on the general fund balance level. Many have found that, if they adequately and continuously communicate the purposes of fund balances, the public can be strong supporters of sufficient balances.

Details: The ?Guarding the Public Checkbook? Leadership Training seminar will take place Wednesday, Dec. 6, from 9 a.m. to 12 pm. For more information or to register for Leadership Training Institute seminars, visit www.nlc.org.

Len Wood is president of the Training Shoppe, a local government training and publishing firm, and a former city manager. He has written seven local government books that may be viewed at www.trainingshoppe.com.