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The City of Loveland has an Emergency Reserve, often referred to by policy watchers as a “rainy day fund”. In addition to the Emergency Reserve in the City’s General Fund, the City has reserves in other funds, and the City rarely budgets all available revenue in a given year in any fund. This means that at any given time, the City has a $4-6 million treasury which is held in safe investments to ensure that the City’s idle cash is yielding some investment income. Most of this treasury comes from restricted funds, such as the Water Fund, and is not available for general government expenditures.
The General Fund’s Emergency Reserve is $1,021,201 in 2013. This means that Loveland sets aside more than $1 million each year which it could spend but does not because it is holding those funds as a reserve. Explicit City Council approval is required before the Emergency Reserve can be tapped. The only time in recent history this was contemplated was in 1999, when portions of Loveland’s Commerce Park were hit by a tornado. Fortunately, this tragedy did not impact the City’s operations and tax revenue severely enough to warrant accessing the Emergency Reserve at that time.
The City’s Emergency Reserve is determined by a best practice formula established by the Government Finance Officers Association (GFOA), an organization dedicated to promoting the public benefit by identifying and developing financial policies and best practices for all types of government bodies. GFOA recommends that a city have a reserve equal to five to fifteen percent of its regular general fund, or one to two months of operating expenses.
Could the City reduce its Emergency Reserve? Yes, with City Council approval. GFOA recognizes that many units of government have elected to spend some or all of their “rainy day” funds in the last three to five years. As such, GFOA recently established a guideline which states that the government should have clear rules for spending reserves and should have a plan for replenishing the reserves. Both the City of Loveland and GFOA recognize that an emergency reserve can be used to patch a budget hole in the short term, but good financial policy requires that adjustments be made to the operating budget to ensure that annual budgets are balanced without reliance upon “rainy day” funds. This is essential because you can only spend the money once and eventually it will be needed for that rainy day.