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Seeing red: Leesburg, others should struggle to keep reserves.

NLC's municipal fiscal survey, released earlier this summer, noted an alarming trend of cities, strapped financially, digging into their reserves to make ends meet. The following editorial appeared in the Leesburg Daily Commercial after the report's findings were publicized. It is reprinted with permission. Leesburg, Fla. is a community of 14,903 citizens.

There are tough times for cities all over the state.

And it's hard for those cities to cut programs when there is a cash reserve just sitting there, waiting to be used.

But city officials should resist, as much as possible, the temptation to whittle away at reserves in an attempt to make budgetary ends meet.

In its preliminary budget process, Leesburg has fallen to the temptation. And other Lake and Sumter cities are likely to follow suit. It's not a wise course to take.

Many local governments are knuckling under to no-new-taxes demands, and that makes reserve funds even more seductive. It's difficult to face the mob mentality that has prevailed at some budget meetings and justify keeping reserves.

That's why officials must understand and be able to persuasively justify the importance of having cash in the bank.

In fact, with city incomes falling unpredictably, cash reserves have become more vital than ever. Dipping into those funds during budget time could end in a disaster by the end of the fiscal year.

Consider this: A city might have reserves of $1 million. By taking half of that money out of reserves and allocating it in the budget, the city wouldn't have to raise taxes and fees to cover $500,000 worth of services.

But what happens if other income such as building fees falls $750,000 short of the level city officials expected? With the reserve slashed in half, city officials are suddenly forced to cut $250,000 somewhere. It's illegal for cities to operate with a deficit.

More than half the cities in the state couldn't match income to expenditure in their last budget year, a recent National League of Cities survey showed.

Maybe next year will be different. But it would be foolish to count on that.

Leesburg's situation isn't desperate - there's no chance the city is going to go broke anytime soon. The city finished 1991 with a balance only $200,000 below its balance two years ago, and that's not much in a reserve of $3.3 million. But the trend has been started.

"The idea is that you build up your reserves in good years and you use them to avoid a major tax increase in bad years", says Jim Williams, Leesburg's finance director. "But it's that pattern you want to avoid ... (use of reserve) can grow and grow rapidly if you continued to do it."

There's no set rule, but Leesburg tries to keep enough cash in reserve to meet three or four months' expenses, Williams says. That's a good guideline, if the city can stick to it. But if the city finds itself in the same situation while making this year's budget, it's time to find money somewhere else or cut city expenses. That could mean cutting city services.

Cities are experimenting with hiring freezes and making do with equipment that might have been replaced in more prosperous times.

Others have bowed to the inevitable and increased taxes and fees. Such a move wouldn't be out of line for local cities if they could find ways to spread such an increase out and reduce its impact.

Officials need to be sure they have tried every other possible method to balance the budget before they dip deeply into city reserve accounts.

Times may get worse before they get better. And reserve funds are the only insurance cities have against economic disaster.
COPYRIGHT 1992 National League of Cities
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1992 Gale, Cengage Learning. All rights reserved.

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Title Annotation:reprinted from the Leesburg Daily Commercial; Leesburg, Florida
Publication:Nation's Cities Weekly
Date:Aug 24, 1992
Words:621
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