The city’s current general fund reserve policy is below recommended levels, which could hinder the city’s ability to economically sustain itself for more than a month in the case of an emergency situation.
The general fund reserve, or rainy day fund, allows the city to provide vital services to the community in cases of economic uncertainty or catastrophic events. According to the Government Finance Officers Association — which provides suggested guidelines for the management of governmental financial resources — a city’s general fund reserve should function at a level of 16.7 percent allocated to emergency scenarios.
As of the current fiscal year, the city’s general fund policy lacks all of the elements recommended by the Government Finance Officers Association, according to city auditor Ann-Marie Hogan.
Until 2008, Berkeley City Council called for a general fund reserve balance set at 6 percent. After a period of vitality following an economic recession, the council adopted an increase to 8 percent, which is still less than half of the minimum recommendation.
“I think that we are an extremely vulnerable city in terms of a fiscal catastrophe, earthquakes, wildfires and flooding,” said Councilmember Susan Wengraf. “Given the climate change situation, we need a reserve to handle this.”
The majority of the revenue for the general fund comes from property and sales taxes. In years of an economic recession — where revenue collected is not as high — the percentage set aside for the rainy day fund could be below recommended values. During the previous fiscal year, the rainy day fund was $26.9 million, or 16.8 percent of general fund revenues, which is in line with the association’s recommendations.
According to Hogan, having a set policy of putting aside 16.7 percent or more in the rainy day fund each year would mean that a tax increase or change in services would not be needed.
While the city has had a reliable revenue stream from taxes in the past, in the event of an economic crisis, a sizable reserve — specified by an actual city policy — will allow the city to maintain operations and provide programs with minimal disruption.
In addition to increasing the city’s policy to the recommended 16.7 percent, the association suggests defining the specific circumstances under which reserves can be tapped, as well as the authorization needed to access the reserve.
“A general fund usually has more specific categorical purposes, such as when there is a shortfall in property tax or in case of an unexpected emergency,” said Larry Rosenthal, campus assistant adjunct professor of public policy.
The city lacks all of these elements which make the fund vulnerable to appropriation for purposes that are not intended for the fund’s use.
The audit recommends taking a closer look at the city’s own situation and conduct a risk analysis of the adequate reserve level. The association’s recommendation, however, is only enough to keep the city working for up to two months if there were no revenue coming in.
“I’m counting on Council to do the right thing because this is a question of generational equity,” Hogan said. “Are we going to be fair to the next generation?”
City Council will discuss this recommendation at its Feb. 23 regular meeting, and city staff will return to the council by Nov. 29 with an implementation status report on the recommendations.
Staff writer Sooyoung Hu contributed to this report.
A previous version of this article misattributed the quote “I think that we are an extremely vulnerable city in terms of a fiscal catastrophe, earthquakes, wildfires and flooding … Given the climate change situation, we need a reserve to handle this” to Lori Droste. In fact, it was said by Susan Wengraf.