DeKalb’s Budgetary Reserves Do Not Mean What You Think They Mean

The City of DeKalb has been re-growing its post-recession General Fund reserve since FY2011, when a large reduction in force coupled with windfall revenues helped the city regain its financial footing. But are annual budget surpluses an indicator we’ve set out upon the right financial path? The latest Comprehensive Annual Financial Report (CAFR) is now available, so let’s see if we can spot the trends.

[easychart type=”vertbar” width=”420″ title=”General Fund Year End Balances in Millions” groupnames=”General Fund Ending Balances” valuenames=”’04, ’05, ’06, ’07, ’08, ’09, ’10, ’11, ’12, ’13” group1values=”3.26, 3.59, 3.83, 3.30, 2.90, 0.05, 0.022, 2.69, 4.67, 3.25″]
The years represented in the above chart are the fiscal years, each of which runs July 1 through June 30.

The reserve looks pretty good now, but I believe it has given city leaders the wrong idea.

The Power of Policies
DeKalb has policies for balanced operating budgets and for growing and maintaining its reserves, and tries to follow both. One of its tools is savvy use of the interfund transfer. During the worst of the recession the General Fund took a $1.4 million advance from the Water Fund, for example. The city also allowed deficits to accumulate in other funds until it had the money to erase them (the original audited GF surplus for FY2011 was $6.3 million but some was used to wipe out deficits).

The good showing in FY2012 was due primarily to the city’s purchase of insurance coverage that eliminated the need for a routine annual transfer from the GF to the Workers Comp Fund (and in fact resulted in a sizeable “refund” back to GF) along with the decision to delay a planned $600,000 transfer for a police station bond repayment because it turned out it wouldn’t come due until FY2014.

Both actions were good moves, but it is important that we understand the budget surplus came from savings, not from sustained growth of revenues.

City Revenues are Rather Flat

[table id=67 /]

DeKalb kicked the remains of the “911 Recession” off its shoes in FY2004 with a sales tax hike, then saw healthy growth in revenues until loss of momentum in FY2007. A spate of tax and fee hikes followed, but as you can see, revenues still took a steep dive in FY2010. They recovered some in FY2011 (helped by a second utility tax hike) and then got stuck; and for FY2013, they are actually expected to drop a bit due to continued flat tax takes and the loss of the Cortland ambulance service contract.

Because of the variability of other revenue categories, it’s easiest to spot the downward/stuck trends in tax revenues, but actually we’ve been losing ground in other revenue categories as well. To check this, I calculated the proportion of total revenues that were tax revenues for each year shown in the table, and it has grown from 84-85% in the earlier years to 87% and 88% in the last two.

In other words, even as tax revenues remain stagnant they are still holding better than other revenues.

Bottom Line: Budgetary Structural Issues Still Exist
I want to show you the structural issue as starkly as possible. To do it, it’s best to eliminate what we might call “noise.” License/permit revenues, for example, are volatile and make up a relatively small part of total revenues, so I took them out. Interfund transfers are the sound of juggling, so they got pulled, too.

What was left were tax revenues and total expenditures before interfund transfers.

[easychart type=”line” width=”420″ title=”Selected General Fund Trends in Millions” groupnames=”GF Tax Revenues, GF Expenditures” valuenames=”’03, ’04, ’05, ’06, ’07, ’08, ’09, ’10, ’11, ’12, ’13” group1values=”16.28, 17.06, 19.32, 20.72, 21.9, 23.65, 24.07, 23.15, 25.63, 25.52, 25.23″ group2values=”18.30, 18.85, 20.96, 22.7, 24.6, 25.83, 25.39, 25.7, 25.91, 26.32, 27.48″ minaxis=”16.0″]

You can see by the diverging lines that expenditures were beginning to outpace core revenues even before the start of the Great Recession — clearly a spending problem — but of course most of the drama lies with FY2010, when a huge gap developed between revenue projections and reality.

Now we see another gap developing, as expenditures begin to resume something of their old trajectory while revenues do not.

Yeah, it’s that simple. We’re on course for another round of budget troubles, no matter what reserves might suggest.

See for Yourself
Tables and charts for this post use data found in the “General Fund Budgetary Highlights” narrative sections and table in Comprehensive Annual Financial Reports (CAFRs) except for FY2013 data, which come from the FY2013 annual city budget. Access both types of documents from the city website Downloads page under the “Finance” heading. Keep in mind, the current budget is subject to change via council-approved amendments during any part of the fiscal year.