June 22, 2011
A government’s fund balance represents savings that it has accumulated and is an important indicator of fiscal health. Previously this blog compared the fund balance levels and policies of the nine Chicago area local governments whose budgets the Civic Federation analyzes. This blog entry compares Chicago with a group of thirteen large U.S. cities that have also been the recent subject of analysis by the Pew Charitable Trusts’ Philadelphia Research Initiative.
The Government Finance Officers Association (GFOA) recommends that governments maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures, which is approximately 17%. The GFOA statement adds that each unit of government should adopt a formal policy that considers its own specific circumstances and that a smaller fund balance ratio maybe appropriate for the largest governments.
The following chart outlines the unreserved general fund balance level of thirteen cities from FY2006 to FY2010 as a ratio of expenditures. It is important to be aware that the fund structure and use of the general fund can differ significantly amongst local units impacting the fund balance ratios. For example, some governments transfer out significant amounts of general fund resources to subsidize other governmental funds, which would not be accounted for as expenditures. The mix of services provided under the general fund also differs greatly. For example, in New York City schools are funded from the general fund whereas in Chicago they are funded in a legally separate unit of government.
In FY2006 the fund balance levels ranged from a negative balance of 12.3% in Detroit to a high of 42.0% in Atlanta. The average fund balance level was 15.3%, which is within the range of the GFOA standard. Chicago had the third lowest level in FY2006 at 0.92%. There was a significant change over the five-year period with the average fund balance level declining to 6.9% in FY2010. Three of the cities have not yet reported their FY2010 fund balance data. Detroit continued to have the lowest level in FY2010 with a fund balance deficit of 14.6%, while Boston gained the distinction of having the highest level at 27.7%. Chicago has not yet reported their FY2010 fund balance, but the City kept the rank of third lowest in FY2009.
While there was a clear downward trend in average fund balance for this group of cities in total, some cities experienced somewhat different patterns. For instance, the fund balance of Atlanta and Seattle had significant fluctuations. Atlanta has had considerable variations in general fund expenditures and it also transfers out resources to its capital fund, which may have contributed to the large changes. Kansas City and Columbus experienced slight improvements in fund balance between FY2009 and FY2010 after previous declines. Detroit continued to have a deficit in FY2010, but the size of the deficit shrank from the previous year.
For FY2009 Chicago had only a nominal unreserved general fund balance equal to 0.09% of general fund expenditures. Not considered in this analysis are legally restricted asset lease reserves held in a separate fund which the City has also been depleting. This extremely low level of fund balance is an indicator of fiscal distress. New York had a slightly better, but still low fund balance level. However, it has much larger general fund expenditures ($57.9 billion versus Chicago’s $3.0 billion in FY2009), which allows more flexibility for a smaller balance and it has had a much more stable ratio.
The next chart presents the fund balance changes for the three largest U.S. cities in dollars instead of as a ratio. Chicago experienced the largest monetary decline in fund balance, decreasing 90.1% over the four years for which data is available. Los Angeles also declined significantly, falling 44.6% in five years. New York’s fund balance increased slightly despite a slight decline in its ratio because the balance did not grow as fast as expenditures.
Overall the analysis indicates a significant deterioration of fund balance over the past five years among the 13 municipal governments, with a few units beginning to recover some of the lost balances in FY2010. The City of Chicago generally compares poorly to the other cities, ranking near the bottom in terms of its current fund balance ratio and in its trend over time.