Cities’ reserves under pressure, too

If you received the bulk of your income in two chunks, you probably would have a plan to keep some of the money set aside to pay the monthly bills. If you're a city with bills and salaries to pay, you do the same thing. It's called a fund balance and more than a rainy day fund, it's a way cities stay on top of expenses that come in throughout the year when most of their revenue comes in June, July, November and December.

How much? The Minnesota state auditor recommends, but does not require, 35 to 50 percent of operating revenue or no less than five months operating expenditures be reserved and not designated to pay for any specific projects. Cities generally aim for that, but the recession and unallotments have taken a toll.

Waconia, a town of about 10,000 located 35 miles southwest of the Twin Cities, will probably see a fund balance in the range of 20 percent of operating revenue, much lower than the 40 percent the city would like to see. Waconia's finances were hit by loss of assessment income from one development. Interlaken was funded by Lakeland Construction Finance LLC, which is now in receivership. The city borrowed to put in roads, lights, water and sewer, which were to be covered by assessments starting in the second half of 2008. City administrator Susan Arntz says those payments, which now total more than $3 million, will be made with interest. Until those payments come in, the cash reserve has to be tapped says Arntz.

We're optimistic we will be able to handle expenses through the next year, depending on how the 2010 finishes. I'm concerned if we end the year below 20 percent.

In Rochester, having a reserve helped cover unallotment last December. City administrator Steven Kvenvold says the city otherwise has been able to keep 41 percent of its operating budget in reserve. In past years, when the budgets were not as tight as they are now, the reserve could cover more capital expenses. But he says that's not happening much anymore.

Faribault's reserves are a bit lower because the city paid unemployment for people who had been laid off in engineering, planning and code enforcement. Income is down from building permits and investments as well, which contributed to a reserve fund level that may be lower than expected come the end of the year. Interim city manager Terry Berg says she's looking forward to the end-of-the-year local government aid payment.

Cities smaller than Faribault and Rochester are keeping less cash on hand. In a 2009 survey, the League of Minnesota Cities asked 445 cities whether fund balances would increase over time, decrease over time or remain stable. Ten percent said they expected to see funds increase, 54 percent thought they would decrease and 29 percent said they would keep the fund balance as is. In cities under 2,500, 7 percent said they expected to see fund balances increasing, 57 percent said the balances would decrease over time and 29 percent saw no change in the future.

The number of cities drawing down their reserves has risen since the middle of the decade, League figures show. Here are the percentages of Minnesota cities that drew down their reserves in each of the past seven fiscal years:

2003 --------- 60%

2004 --------- 46%

2005 --------- 33%

2006 --------- 31%

2007 --------- 32%

2008 --------- 47%

2009 --------- 44%

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