Tuesday, August 30, 2011

Rainy days, hurricanes, and reserve funds

by Andrew Nelson

Here's a question I've been asking myself recently: how much money should be in a "rainy day" (or reserve fund) for a city? In addition to pension reform, pay cuts, hiring freezes, tax hikes, and program cuts, cities have also thinned out their reserve funds in recent years. Then the East Coast gets an earthquake (albeit minor) and a hurricane within a week of one another. How will they pay for repairs?

I've heard some individuals argue that having large rainy day funds is an act of government tyranny - surplus funds should be refunded to citizens. I generally agree. However, I think that cities could benefit from having strong reserve funds which are perhaps larger than one would normally accept. For example, a reserve fund could be legally set at annual growth plus one percent and eliminating the reserve fund's growth during hard economic times. I find it unfortunate that cities have already faced three years of cuts and then get barraged by unconnected acts of God and realize they have no more money.

In years of plenty, what is wrong with having a structural surplus of reserve funds? Do you think it is acceptable for local governments to maintain a large, yet reasonable, rainy day fund, or should the money be refunded to residents?

For more information on how Hurricane Irene has affected local governments, read this story in the New York Times.


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