It was not so long ago that we were talking about local and state governments suffering major shortfalls in their revenues as a result of the downturn in the economy. Cuts were being made to police, fire, education and parks. Politicians were fussing over the need to cut taxes and cut government expenditures in the process. Employees lost jobs and benefits were cut. In a prior blog we discussed the fact that economic upticks and downturns were cyclical, and unlike people, there is a tendency for local and state government policy makers to “hang with the curve” so to speak and have government expenses track the economy as opposed to try to stabilize spending by taking advantage of the ups to create reserves in order to take advantage of the downs. They ignore the old adage that their grandparents told them – save for a rainy day. And we don’t recognize those rainy days approaching! It is not a lot different unfortunately than many citizens who spend when they have money, and are short when they don’t. We are not a country of savers and it hurts us often.
There is however a major benefit for government to have reserves. When government has reserves, it can take advantage of lower competition to construct or invest in infrastructure in lean times. There are many examples of governments getting construction done at discounted rates based on timing their projects to economic downturns. A side benefit is that those governments are spending money at the time when they need to keep people employed. FDR did this during the Great Depression. Obama attempted to copy him in 2009 with the AARA monies. In both cases they may not have invested enough, but both were faced with deficits on the federal level and a Congress that was reluctant to spend.
The economy has rebounded and state and local governments are starting to run surpluses. The South Florida Sun-Sentinel recently reported that the big “challenge” for the Florida Legislature and many other state and local governments, is they are running surpluses. Recall the last time the federal government ran a surplus, we got tax cuts that immediately put the feds back in the red because they had not built up any reserves, and won’t even with a balanced budget anytime soon. Well Florida has $1.3 billion extra on hand and guess what we hear in this election year – tax cuts, more money for special projects, extended sales tax exemption dates, etc. Those running for office are thrilled with the surplus because it helps their platform but we hear nothing about restocking the trust funds that were raided during the 2009, 2010 and to some extent the 2011 budgets!
Expect this to be the norm, and the rhetoric should be troubling to fiscally responsible people. If we have surpluses, times must be better. In good times we should be encouraging decision-makers to sock money away in reserves, savings and other solid investments, and at the same time restocking those accounts drained to pay the bills during the down time of the Great Recession. In Florida, our highway trust fund, environmental trust funds and education funds were drained. They have not been restocked. In fact the cuts to most of those programs has not been restored either. The next economic downturn will come – will we be prepared to weather storm by spending our savings as opposed to cutting services which magnifies the impact of residents?
As times get better, utilities owned by local governments should pay particular attention to General Fund revenues. Many of those General Funds increased contributions from the water and sewer funds to make up the difference in losses of property and sales tax dollars. That prevented utilities from making investments, or forced them to borrow money to cover investments that might otherwise have been paid for in cash. Time for the General Fund to pay the utility back! Time to restock the reserves and time to spend money to catch-up with the deferred maintenance and capital. Of course the costs are not what they were 3 or 4 years ago, and neither are the interest rates, so we all pay more for the same projects because we could not spend the reserves in the down period.
Utilities should always have significant reserves. Nothing we do is inexpensive, so having reserves makes it possible to fix things that inevitably go wrong. Reserves are a part of a well operated, fiscally sound utility. Taking money from the utility during down times hurts both the utility and the local government. Total reserves diminish of the entity, making it less possible to deal with emergencies, cover the loss of revenues, or take advantage of lower costs for construction projects. Meanwhile, creating reserves and a pay-as-you-go system for ongoing replacement of pipes and pumps is good business. It insures that ongoing money is spent to prevent deterioration of the utility system. The reserves allow for accelerated expenditures when times are tough, prices are down and people need work. When utilities spend money, it translates to local jobs. But the only way to do this is make convincing argument of the benefits of reserves and spending.