should be done with the city of Sedonas $9 million reserve?
by Paul Chevalier
Editors Note: Chevalier is the Chairman of
Sedonas Art and Culture Commission. He is a retired Senior Executive
of a major retailer where he was responsible for law and personnel.
He holds a Degree in Government from Columbia College, a Law Degree
from Columbia Law School and Business Degrees from both Columbia
and Harvard Business Schools.
Our city government has a $9 million assets reserve
in its general fund. In my opinion, having this large a reserve
is not in the best interests of the people of Sedona. For an explanation
of this opinion, it will take a few minutes of your patient reading.
In about 1995, our City Council took a hard look
at the amount of money our city had in its general fund reserve,
and concluded (correctly, I think) that our citys reserve at that
time was inadequate.
I have been told that in 1995 our citys general
fund reserve was in the range of $1 to $1.5 million. Our city
staff, at that time, was instructed by the Council to budget conservatively,
so that each year money would be added to the city general fund
reserve. The staff did what it was told, and today our city reserve
stands at more than $9 million.
Our annual City General Fund budget is approximately
$7.5 million. This means that the general fund reserve equals
120 percent of the annual budget.
How much is enough?
The question is: How much money should the city
of Sedona have in its general fund reserve?
I presented this question to Eric Levitt, who
is not only our city manager but also functions as our citys chief
finance manager. Mr. Levitt did not personally take a position
on this question, other than to say that he believed that our
reserve was larger than it needed to be. He did tell me that a
commonly used rule of thumb is for a city to try to have a reserve
equal to 50 percent of its annual budget, and, in addition, to
have an adequate reserve for interest due on city bonds.
One-half of Sedonas annual budget is around $3.75
million, and, according to Mr. Levitt, an adequate reserve for
interest on Sedonas bonds is around $500,000. If Sedona was to
adopt this rule of thumb, then our general fund reserve for this
year would be sufficient at $4.25 million.
What are the advantages of Sedona having an adequate
reserve? I can think of three.
1. With an adequate reserve, our city doesnt have
to worry about having money for budget overruns or emergencies.
2. Citizens do not have to worry about being taxed
to pay for needed funds.
3. Holders of our wastewater bonds and other debts
do not have to worry about the city having money to pay interest
and principal when it comes due.
These advantages are important. The real question
is how much of a financial reserve does our city need to keep
these advantages? Maybe the answer is $4.25 million, using the
above approach. Perhaps there is a better way of determining an
appropriate reserve. My point is that a method of determining
an appropriate reserve for Sedona should be agreed upon by the
City Council and the Council should then use the excessive reserves
we have wisely.
As you can imagine, Sedona has many bona fide
uses for excessive reserves. Three come to mind. No doubt many
of the readers of this article can add to this list.
1. Use some or all of the excess reserve to pay
off some of our citys $70 million debt. The money we have in our
city reserve earns us less than two percent interest, because
of government restrictions on how cities can invest money. Meanwhile,
city-owed debt that could be paid off is costing our city around
five percent interest.
And saving interest is not the only reason to
retire debt. In my opinion, Sedonas total indebtedness is too
high. Sedona has the dubious distinction of having the highest
per capita debt of any city or town in Arizona. Each of us needs
to decide how we feel about this. It makes me uncomfortable.
A note to the positive. . . I have been told that
the city is seriously considering using $1 million of its reserve
to pay off the remaining purchase price for the land recently
acquired to create the Uptown parking lot. (Note: If our city
government does not do this, then our city debt will increase
by another $1 million.)
2. Use some of the excessive reserves to increase
government financial support to existing important community services.
I believe that it is the opinion of most of the citizens of Sedona
who think about these issues, that the city government does not
give enough support to existing important community services,
particularly our Sedona Public Library and Sedona Humane Society.
Sedona has increased library financial support
in its most recent budget, but our city governments percentage
of financial support is still far below practically any other
city or town in Arizona that has a library.
3. Use some of the excessive reserves to help
pay for additional community services that Sedonas citizens want.
This is a tricky area. Sedona voters, earlier this year, substantially
defeated a proposal for financing a recreational center, which
was endorsed by the city council. That proposal had little private
funding and was far too costly to the city.
The voters of Sedona do focus on financial issues
and will reject proposals that are not well conceived. I do believe
that the citizens of Sedona want more community services provided
that the city financial involvement is realistic. I believe that
city financial participation in a scaled-down version of a recreation
center and/or financial participation in a well-planned indoor
performing-arts center would have support from our citizens. Some
of the excessive reserves should be earmarked to help support
(along with private donations) carefully thought-out and financially
sound projects of this nature.
A new city council term has just begun with some
new council members starting their terms. Now is a good time for
the City Council, in conjunction with the city manager, to make
it a priority to determine: a) the appropriate amount of money
to keep in reserve, and b) what to do with the excessive reserve
funds that are on hand.