Financial reserves in government: Part 1
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EmailAvailable cash is critical for both governments and nonprofits to successfully manage assets, new opportunities and timing issues with revenues and expenditures.
The need for and use of financial reserves by nonprofit organizations is the subject of an excellent article by Kate Barr, Executive Director of the Nonprofits Assistance Fund, in the summer 2015 issue of the Nonprofit Quarterly. Most of the points in the article apply to governments as well, and they also raise issues which governments need to consider in their financial planning.
In “Balancing the Mission Checkbook: Clearing Fuzzy Thinking about Nonprofit Reserves” Barr cites “three primary purposes for having reserves.” The first is repair and replacement of fixed assets. She points out the importance of preparing for equipment repair and replacement expenses by “developing a systems replacement plan”, and also the need for additional cash reserves to cover unanticipated breakdowns.
Even though governments, nonprofits, and businesses all know that assets have a limited life span, and we also know that some will suffer catastrophic failures long before we expect them to, it is also fairly common for organizations, especially small ones, to put off saving for these expenses in order to fund current operations. Some of the fiscal distress local governments are currently experiencing is directly related to this type of “kick the can down the road” fiscal decision-making. Responsible fiscal leadership, whether in nonprofits or governments, requires consideration of all the costs of doing business, and a plan to cover those.
“Unexpected external problems” is Barr’s second reason for having financial reserves. She cites the value of reserves to “stabilize the nonprofit in case of unexpected, often external problems”. This is equally true of governments. She also cites unexpected delays in grant funding. Many governments need reserves to assist in similar timing issues that are known in advance. Especially when property tax revenue is a significant part of the revenue picture for a local government, the timing of once or twice a year revenue streams can pose problems matching the revenue to the ongoing expenses. If, for example, half of the revenue comes in 2/3 of the way through the year, that governmental unit will need reserves to cover expenses for a couple months while waiting for that scheduled revenue stream to come in. Some might say the government should just adjust the timing of the revenue, but that timing is often set by state statute and not easily changed by the local government.
In part 2 of this Michigan State University Extension article on financial reserves in government, we’ll discuss Barr’s third point, providing for long term changes in strategy or redesigning and expanding programs.
