City Budget Reserves and the Impact on Taxpayers

Some cities may have collected more taxes than they needed and now they’re stockpiling your cash.

Why the numbers matter

During debate in the 2023 Iowa Legislature over a technical correction related to the taxable value of properties, the spotlight touched on the topic of reserve funds. The correction in question lowers the amount of taxable valuation cities and other local governments can draw from, and some claimed they would have to cut emergency management positions or other core government services to make up the difference while others said they would raise taxes. This threat led lawmakers and others to examine local government reserves to determine whether there would be enough cash on-hand to fill any perceived gaps. It also led ITR Foundation to review financial information of 936 Iowa cities to see exactly how much cities have in their coffers.

What a reserve fund is

In local government finance, reserve funds are also referred to as “ending fund balances.” Essentially, they represent the accumulation of operating surpluses a city has been able to leave untouched and available for future use. Of course, because nothing is straightforward in government finance, many different types of reserve funds exist, but the one considered a true reserve fund is the General Fund Unassigned Fund Balance. Local governments aren’t restricted in how they can spend “unassigned” dollars. They can stabilize cash flow during the first few months of a fiscal year before receiving property tax payments, provide cushions for unexpected expenditures or unforeseen dips in revenue, or apply them to any other uses that state or local rules don’t forbid.

Statewide numbers

The following map shows the 100 largest cities in Iowa and their reserve funds as a percentage of their expenditures — that is, how much of their budgets they could fund with no revenue at all. A good governance rule of thumb suggests a responsible and reasonable ending balance target would be somewhere between 15 and 30 percent of annual General Fund Expenditures. Unassigned General Fund dollars, or reserves, beyond that range may be considered excessive.

For fiscal year 2022, Iowa cities had more than $1.1 billion in their Unassigned General Fund balances, compared with around $1.9 billion in General Fund expenditures. The average percent of unassigned general fund dollars in comparison to general fund expenditures for all 936 cities came to 125 percent, well above the reasonable range.  This means many cities may have collected more taxes than they needed and now they're stockpiling your cash.

In the details

There are 121 cities that have zero reserves, the largest is Fort Dodge. That means if there was some unforeseen event that caused these cities to need additional funds, they would either have to cut somewhere else or raise taxes. And while having zero reserve funds is not a good situation to be in, having negative reserve funds is even worse. There are 36 cities with negative reserve funds, which means they are either overspending or they have an accounting problem. For FY2022, all the cities with a negative reserve figure have an average of negative 71.8 percent of annual General Fund Expenditures and are below the 2,000-population threshold requiring an audit.

Cincinnati (pop. 283) has the least reserves, with negative $540,938, or -1,003.4 percent of annual expenditures on hand. Osterdock (pop. 44) has the highest percentage, with 2,279.4 percent, and Cedar Rapids (pop. 136,429) has the largest balance overall, at $152.1 million.

In total, 640 cities are holding more than 30 percent of their expenditures in unassigned fund balances, with 346 of them over 100 percent of expenditures. Only 88 of Iowa’s 936 cities are within the 15-30% range.

Where to find this information

Details for your city can be found directly from our source: 2022 Annual Financial Reports from Iowa Department of Management. If you decide to look at the data yourself, keep in mind that cities use different accounting methods: cash accounting and accrual, or Generally Accepted Accounting Principles (GAAP), accounting. While this distinction doesn’t make a big difference to most of us, it matters significantly when digging into cities’ budgets and aligning tax collections and expenditures. Thirty-two cities use GAAP while all the others use non-GAAP or cash basis accounting.

To see the data ITR Foundation collected from the Department of Management and the US Census Bureau, click here.

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