For taxing bodies, no limit on reserve funds

Some area taxing agencies have a reasonable amount of reserve funds on hand for emergencies. The McHenry County Board has a rule to not allow an excessive amount in reserves.
Some area taxing agencies have a reasonable amount of reserve funds on hand for emergencies. The McHenry County Board has a rule to not allow an excessive amount in reserves.

For many years, the McHenry Township Fire Protection District has saved its money for some potential capital projects, including an expansion of its headquarters.

There is a $17 million reserve, which includes $7.9 million set aside for future building projects. The annual operating budget for the district is $7.5 million.

After the reserves had reached more than twice the operating budget, the fire protection district decided to lower its property-tax levy request for the second consecutive year.

Money it will receive this year, and received last year, was reduced by $1 million a year.

“We’ll reduce it because we’ve done a good job saving money,” Fire Chief Tony Huemann said.

Having money in reserve helps in emergencies or with cash-flow issues, as revenues may not come in at regular rates throughout the year. Reserves keep taxing bodies in a good financial position, and many save money for large capital purchases to avoid taking out loans.

In taxing bodies, having reserves allows them to continue to provide services even when revenue drops.

“In an economic downturn, where we don’t have the revenue, we have to provide emergency services whether we have reserves or not,” Huemann said.

The $7.9 million is for a planned expansion of Station 1 at 3610 W. Elm St. in McHenry, which is on hold because bids came in higher than expected, and for future land acquisition for a fifth station in the northeast portion of the district, to improve response times, Huemann said.

“We don’t buy anything unless we could pay for it in cash,” Huemann said.

“We don’t spend because we have it; it’s there for projects and there for planning,” Huemann added.

“Just because we collect it, doesn’t mean we have to spend it [and] ... just because we can collect doesn’t mean we should, either.”

Marianne Shank is the executive director of the Illinois Government Finance Officers Association, which is a professional organization of municipal finance directors. Some municipalities have policies in place for a minimum amount to have in reserve, and some even have caps on what they can have in reserve, she said.

However, there is no state law mandating a certain level of financial reserves.

“That would be another layer of mandates for local [municipalities] to deal with,” Shank said.

When municipalities have high reserve amounts, it’s important to see what the money is earmarked for, she said.

Some might be committed to pension funds, or if the taxing body is saving up for a large purchase or capital project.

“Every case is different,” Shank said. “It’s really important to look at long-term liabilities of the government and what the taxpayer exposure is there. ... One shouldn’t examine the amount saved without looking at the other side of the balance sheet and looking at the liabilities.”

Peter Stefan, finance director for Lake in the Hills, said the village has a municipal code requirement that there be at least 25 percent of the previous year’s expenditures in the reserve.

The village dipped into reserves in 2008, 2009 and 2010 when the economy went sour, and also cut back on capital replacement and personnel costs, Stefan said.

Currently, Lake in the Hills has $7.3 million in reserve, with an operating budget of about $15.5 million.

The healthy reserve allows the village to pay off debt ahead of schedule, Stefan said.

Roscoe Stelford is the finance director for the city of Woodstock, which has a policy that it needs to have at least four months of operating expenses in reserve in its general fund.

While the money is in reserve, it is invested so it can generate interest income and help offset operating expenses. The money usually is invested in low-risk accounts, such as money market accounts, Stelford said.

Having money in reserves allows for liquidity to pay bills and payroll on time, because revenues don’t come in evenly throughout the year.

For example, property-tax revenue comes in June, September and October, Stelford said.

Having a healthy reserve also increases the chance a municipality will have a good bond rating, which is important for when it needs to take on debt.

Emergencies, such as natural disasters, are a key time for reserves.

“The more you have sitting in reserves, the bigger problem you can address,” Stelford said.

In the Woodstock general fund, there is about $4.4 million in reserves, with an annual budget of $9.69 million.

Stelford did note that if reserves do get too high, there always is the possibility of pulling back on taxes.

“Our city council is supportive on talking about property-tax relief whenever possible for residents,” Stelford said.

How much should they have?

The Government Finance Officers Association of the United States and Canada recommends municipalities have a some sort of policy requiring a certain level of unrestricted reserves. It also recommends a minimum two months of expenses be saved in general fund reserves.

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