MONEY MATTERS
Reserve Policies for Special Districts – How Much is Enough? By Cindy Byerrum, MPA, CPA, Partner, Eide Bailey CPAs
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solid reserve policy is important to all agencies, no matter the size or type of your special district. A properly designed reserve policy sends a positive signal to the community of ratepayers, bondholders, rating agencies, and regulatory agencies that a district is committed to long-term financial health and viability. Prudent financial management and best practices dictate that an agency maintain appropriate reserves for emergency uses, capital projects, obligations to paid in the future, and those required as a result of legal or external requirements. The challenge for a governmental agency is to set reserve level targets that are sufficient to meet the needs of the agency now and in the future, while following the concept of inter-period equity, which means that constituents pay for the services provided 42
and used by them in the current period. In other words, a solid reserve policy helps avoid kicking the can down the road! Common objectives of a strong reserve policy: • Establish a stable fiscal foundation that ensures proper fiscal management and policies that guide future district decisions. • Build adequate reserves over time. This action will provide the district with resources to help stabilize the agency’s finances and position it to easily absorb economic downtowns or large-scale emergencies. • Help the district to meet its shortterm and long-term obligations and maintain the highest possible credit rating. • Provide for current and future replacement of existing assets as they reach the end of their useful lives.
In general, there are three primary types of reserves: operating reserves, capital reserves, and restricted reserves. Typically, operating and capital reserves are board designated through formally adopted policies, and restricted reserves are restricted by external legislation or governing board ordinances. Operating Reserve: An operating reserve covers contingency funds to continue operations in the event of an unanticipated cash shortfall. This reserve ensures continuity of service during an unexpected event, whether it be an economic shortfall, natural disaster, or other forces affecting revenues or expenses. The GFOA (Government Finance Officers Association) recommends 90 days of operating expenditures as a minimum in an operating reserve. The GFOA has also indicated that “the adequacy of unreserved fund balances should be assessed based upon a government’s own specific circumstances…and the choice of revenues or expenditures as a basis for comparison may be dictated by what is more predictable in a government’s particular circumstances. In either case, unusual items that distort trends (one-time revenues and expenditures) should be excluded…” The GFOA also recommends a “risk-based approach” to determine the threats that are unique to each agency when determining appropriate reserve levels. In assessing a district’s operating reserve, certain districts should consider a higher operating reserve if their revenues are highly variable. California Special Districts • July-August 2021
