Final Budget 2013 Post: Reserves

The final budget vote for 2013 happens this Thursday commencing at 4pm.  The budget is currently sitting at a 1.2% tax increase, or $5.6 million.  This represents the hard work of citizens to save things like affordable housing, public transit hours, library services, and new bike lane connections.  However, this flies in the face of mayor Fontana’s campaign promise of four years of 0% tax increases.  Therefore, there may yet be a rabbit pulled out of the hat, as signaled by a meeting of 7 of the Fontana 8.

The most likely target to find $5.6 million is reserve funds.  You can find out all about what reserve funds are and the state of London’s reserves in this handy link from City staff.  I had the privilege to sit down and discuss reserve funds with the Director of Finance, Martin Hayward, and there were a few key points I learned:

Firstly, reserve funds are more like chequing accounts than savings accounts.  When we hear ‘reserve funds’ we often think of rainy day funds, like you and I may have some money in savings in case of a financial crisis.  However, reserve funds are all for anticipated costs, they are very specific, and there is no money in there unless we plan on using it.  Reserves are the money we have available to us for day-to-day business of the City, be it today’s spending or next year’s, or next decade’s.  If we didn’t have this money, we would have to take on debt to run the city.

Secondly, building on the first point, reserves are indicative of a plan, and if you change the reserves, you change the plan.  Take for example the graph below that represents a hypothetical reserve fund that is built over time to replace city vehicles.  We put in as much money as we exactly anticipate we need for the number of vehicles we plan to replace.  If we change the contribution, then we are actually changing the number of vehicles, which changes our ability to deliver services:

Reserve Fund

Thirdly, reserve funds act as the key buffer against debt in terms of determining our municipal credit rating.  Debt is the number one determinant, and you can see in this post how debt is set to go up.  However, having healthy reserves is used to mitigate against debt in making the calculation.  That said, for all the glowing talk of having more in reserves than ever (which of course makes sense as we continue to grow as a city), we still fall below the municipal average of reserves against debt.

All-in-all, decreasing our planned reserve fund contributions today means a plan for service cuts tomorrow.  So, if the public is rejecting service cuts now, lets also reject future cuts.

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