A budget fight we didn't need: The case for a 'fund balance' policy

At the end of this year's budget debate, Mayor Nutter and City Council had two primary disagreements. The first was over the soda tax. Nutter wanted one, and Council didn't.

The second was about the size of the city "fund balance" (another way of saying "budget surplus"). Nutter said we needed $64.4 million. Council would've been content with $42.5 million.

Depending on who you ask, the fund-balance debate was either the reason for the fight over the soda tax, or an excuse for it. Either way, a lot of energy was spent on it.

It seems strange to be talking about a surplus in this economy, but a fund balance is necessary for covering unexpected expenses, like a big court judgment against the city or a series of large snowstorms.

The balance also helps the city with cash flow. Because taxes come in only a few times a year, the fund balance represents cash on hand the city can use to pay workers and vendors. It's like making sure you always have enough money to pay bills due in the middle of the month if you only get paid at the end.

How does a city know how big a balance it needs?

It can be tricky.

In Philadelphia, fund balances are decided by the mayor. Not surprisingly, they vary widely from year to year: The city enjoyed a fund balance of about $141 million in fiscal 1999, while in fiscal 2009 it had about $60 million.

The Government Finance Officers Association, a group of government finance directors, issued a recommendation in 2009 that governments establish a formal policy on the size of their balances. That should include fund-balance targets that take into account different economic and fiscal conditions, the group said.

The idea is to depoliticize the issue, so the fund balance doesn't get pulled into a proxy fight about, say, a soda tax.

The Pennsylvania Intergovernmental Cooperation Authority, the state agency in charge of approving the city budget, thinks a fund balance policy is a good idea because it "removes the politics" from the issue, according to chairman James Eisenhower.

PICA can't institute a policy itself because the agency's enabling legislation only allows it to ensure that the city submits budgets with a positive cash flow for each month of a fiscal year.

And not every municipality has a fund-balance policy. Most in Pennsylvania get by without one. And several large cities don't have one, either. States are more likely to have formal policies, said Amy Resnick, editor of Bond Buyer, a trade publication.

But, Resnick said, a policy could help a city like Philadelphia, which is still dealing with the fallout of major budget problems it faced in the early 1990s. The city has to pay higher-than-average interest when it borrows money because investors are still jittery. A fund-balance policy might calm their nerves.

Washington, D.C., had a congressionally mandated fund balance imposed on it as part of a plan to get the city out of a similar budget crisis. Today, despite the recession, D.C. is in pretty good shape.

So how does Philly get one of these policies?

Well, the easiest route would be for the finance director to publish one, which the administration could use in its budget proposals. But this approach could lead to similar fights between the administration and Council about whether the policy should be followed.

In order to create a binding policy, Council would have to vote on a charter-change resolution for voters to approve. But this is a big hurdle - and one that current city leadership doesn't seem eager to take on.

The Nutter administration says that since the city is already required to maintain a positive fund balance, it doesn't see a need for more detailed requirements.

And Councilman Bill Green argues that a "rainy day fund" would ensure fiscal stability better than a fund-balance policy. He's co-sponsoring a resolution with Council members Marian Tasco and Jim Kenney to create one. He says that, unlike a fund balance, it couldn't be raided to pay for things like union contracts, since how to use a fund balance is up to the mayor.

Green says city can manage without a fund balance by coordinating payments so the city never has to pay out more than it has on hand - though this would require perfect foresight.

Even if the city were to institute a policy, it would take a few years to get the fund balance up to GFOA-recommended levels: Five percent of either the city's projected revenues or expenses.

The mayor's five-year plan has the city finally hitting near that target, about $191 million, in its final year. This year's balance will be either 1.7 or 1.1 percent of the budget, depending on which side gets its way.

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