Cities can prepare for future fiscal challenges by maintaining adequate levels of general fund ending balances.
Why build ending balances?
- Unlike states' "rainy day funds," there is no trigger mechanism-such as an increase in unemployment - to force release of reserves; instead, ending balances are available for spending at any time or for saving for a specific purpose. Ending balances, which are transferred forward to the next fiscal year in most cases, are maintained for many reasons.
- Cities build up healthy balances in anticipation of unpredictable events such as natural disasters and economic downturns.
- Ending balances can be set aside funds for planned events such as construction of water treatment facilities or other capital projects.
- Bond underwriters also look at ending balances as an indicator of fiscal responsibility, which can increase credit ratings and decrease the costs of city debt, thereby saving the city money.
As economic conditions have made balancing city budgets more difficult in recent years, ending balances have been increasingly utilized to help fill the gap. In 2010, cities reduced their ending balances to 17.4 percent of expenditures. And, in 2011, city finance officers projected ending balances at 15.4 percent of expenditures (See Figure 10). If this projection holds, since the high point in 2008, cities will have drawn down total ending balances by nearly 40 percent (from the high of 25.2% to 2011's 15.4%).