Implementing a risk-based reserve strategy in Colorado Springs.

Author:Fu, Elizabeth
Position:Reprint
 
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This article was originally published in the January 2015 issue of Public Sector Digest.

In fall 2013, Public Sector Digest featured an article on the City of Colorado Springs, Colorado, and its approach to analyzing reserves based on risk factors. The city wanted to maintain emergency reserves in an amount that was specific to its circumstances. By working with the Government Finance Officers Association (GFOA) and Public Sector Digest, it identified target reserve levels, as well as ways to support and maintain its overall reserve strategy

Much has happened in the two years since the reserve planning began. This article provides an overview of the initial risk-based reserve analysis, as well a progress report on how the reserve has been used and current reserve levels.

THE INITIAL ANALYSIS

In 2011, Colorado Springs began the process of determining how much money it should maintain in reserve. General standards were considered, including GFOA's best practice (1) of maintaining no less than two months (or 16 percent) of regular general fund operating revenues or regular general fund operating expenditures in the city's "unrestricted" (2) portion of the general fund. At the same time, Colorado Springs hoped to find a dollar figure tailored to its circumstances. The city was sensitive to the argument that while reserves provide a government with the ability to respond to and buffer against uncertainty and risk, excessive reserves could be used for additional services or even be returned to citizens (e.g., through lower taxes).

GFOA conducted a review of the risk factors that generally influence the amount of reserves a municipal government should hold. (3) (A risk is defined as the probability and magnitude of a loss, disaster, or other undesirable event. (4)) Working with the city, these risk factors were then classified as primary (volatility of sales tax revenue; the potential for the city's storm sewer and bridge infrastructure to fail; and the city's vulnerability to extreme events such as wildfires, floods, and, to a lesser extent, snowstorms) or secondary (cash flow and the potential for unexpected spikes in expenditures). GFOA then analyzed the city's level of exposure to these risks in order to calculate a customized target reserve level for the city's general fund. The results of the analysis recommended approximately $54 million (or 25 percent) of the 2012 budget's general fund revenues dedicated to reserves--$27 million dedicated...

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