Tax Rate Truth – Part 4: Reserve Funds

It is vital that we maintain the healthy reserves that keep our community fiscally secure. Alderman Massey refers to these as “profits” in his discussions on the topics; however, it is more accurate to think of them as savings accounts. In the next to last reading of the budget Alderman Massey (seconded by Alderman Barzizza) proposed a property tax cut (discussed in this blog). Their proposed cuts remove the funding that goes into our reserve balances and potentially require the draw down of those reserves.

Reserves are built over time with the knowledge that there are significant investments in infrastructure that are needed to maintain a city like Germantown. This is something the city has done very well over the last 20 years. Responsible fiscal management has lead to award winning budgeting processes and allowed our city to not just grow but thrive. This firm financial base is the foundation for our best in class city services like our Fire and Police. They don’t come cheap and require investment to maintain those levels long term, along with our schools and quality of life amenities like GPAC, Library and Parks.

Let’s look at a real world example. The city will likely need a new fire station in the not too distant future. This is something that is in the city plan and part of the strategy for building reserves. We as a community could pay for this one of two ways. We could build reserves and pay for most of it as the expense is incurred or we could borrow money to pay for it. At current rates and a 20 year bond term we would pay $6,476,702 for a $5,000,000 fire station as opposed to paying cash out of our savings.

But the implications of borrowing money go beyond the cost of borrowing money. This is where experienced financial leadership and municipal planning become extremely important. If you borrow money for the fire station you can’t borrow money for other improvements or even maintenance items in the city. Think about all the deferred maintenance that is being addressed for GMSD as they catch up on years of neglect. Like your household, the city has limited borrowing capacity so we need to be wise about what we choose to use the bond funding option for. It doesn’t stop there either. The more you borrow the more reserves you need to maintain your bond rating or the rates for borrowing go up. The other option is that you get a tax increase every time the city has to do a major project. Poor planning puts the city in a “paycheck to paycheck” mentality and increases the likelihood of more frequent tax increases.

The other thing of concern is that if we follow the policy proposed in the last budget meeting it is likely that we would lose our AAA bond rating. This just compounds the fiscal issues by raising the rates at which we borrow money. While this policy may reduce your tax rates in the short term it is very concerning in the long-term impact of raiding the piggy bank for a short-term win. It takes years of disciplined fiscal management to get in our enviable position. Unfortunately, one bad budget can undo all of that work.

Author: Brian Ueleke

Husband, Father and Germantown resident. Offering experienced perspective with a Finance degree, MBA and 15 years of Corporate Finance experience in budgeting, operational and capital project analysis. View all posts by Brian Ueleke