City Sits on Rainy-Day Fund, Shortchanges Taxpayers

There is one principled issue when it comes to government spending that is gaining far too little attention in the public policy arena. Our governments, especially at the local level, often sit on large rainy-day funds that they built as a financial cushion for those days when the economy goes into a recession and tax revenues fall short of spending obligations. Interestingly, now that the economy is indeed in a recession and there is very much need for the deployment of those rainy-day funds, states and cities tend to refuse to use them.

A good example is the city of Lawrence, Indiana. This is a slice of traditional, American heartland. Located on the north-east outskirts of Indianapolis with its 45,000 residents, Lawrence matches the national average in almost every way: income, household size, crime rate, education… and of course the recession. It comes as no surprise, then, that the city is running a budget deficit: it can only fund $19 million of its $21 million (general fund) budget with current revenues.

And, true to the American Heartland character of their city, the elected officials in Lawrence are wrestling with the question of whether or not to spend the city’s rainy day fund to cover the deficit. The Indianapolis Star reports:

Lawrence is considering deep cuts from its public safety fund to bridge the city’s budget gap for 2013. Mayor Dean Jessup is proposing to slash about $600,000 from the Lawrence Fire Department budget. This entails eliminating 24 civilian EMT positions and replacing them with firefighters. Jessup’s budget proposal also includes a $30,000 cut from the Lawrence Police Department budget.

The city does not publish its budget online. This makes it difficult for the general public – including the city’s taxpayers – to see what their elected officials are doing with their money. But assuming that there is no unusual levels of waste going on, the city’s budget situation is representative of what most local governments are going through these days.

Which brings us to the question: what do you do about it? Unlike a state or the federal government, a city is relatively limited in its options when it comes to improving its economy. This is especially true for a city like Lawrence where many of the residents are commuters and thus depend on jobs outside of the economic jurisdiction of the city.

Still, the city does have some options. One of them is to put its rainy day fund to use:

City Controller Kim Diller said if Lawrence were to use its rainy day fund to shrink the $2 million deficit, the city will be a little more than $1 million in the hole for 2013. “That’s not what the mayor wants to do,” Diller said. “It’s not fiscally sound.”

This is an issue of principle. The city has obviously over-taxed its residents for a number of years in order to build the rainy-day fund, for the very purpose of having some margins available when the economy is weak. Now, the economy is weak. Should not taxpayers be allowed to enjoy the benefits of having over-paid for city services in better times?

Apparently, city officials in Lawrence don’t think so. They believe that it is “not fiscally sound” to use the rainy day fund. But even thoguh I am not a taxpayer in Lawrence, I do have to ask: how it is fiscally sound to cut city services for taxpayers who have been over-paying for them for years (taxes for current expenditures plus taxes to build the rainy day fund) and have money sitting uselessly in the bank?

The Indianapolis Star again:

Keith Johnson, Jessup’s deputy chief of staff, said the mayor thinks cutting EMT positions is a viable solution because that would enable to [sic] city to keep the same number of fire stations, fire engines and ambulances. But City Councilwoman Linda Treat said she does not support the mayor’s proposal. “Public safety has always been a top priority for the council,” Treat said. “It’s the one thing we cannot afford to lose.”

Councilwoman Treat has a very good point: public safety is a core government function. Since, again, the city does not publish its budget online, it is difficult for an outside observer to assess what else the city could cut down on. However, if it is spending money on economic development – which it appears to be doing, given that the city has an economic development director and a redevelopment commission – this would be a good time to consider short-term priorities. Such priorities could include scaling back economic development spending while using rainy-day funds to save core government functions.

That said, it is also important to recognize that the city, ccording to the Indy Star story, has a history of making relatively sound budget priorities. But the city has also fallen for the temptation to take temporary federal money for permanent expenditures:

History indicates that Lawrence had spent a huge chunk of its budget on public safety. But that spending appears to be why the city is now in a deep budget hole. In 2010, Lawrence hired 18 firefighters and bought a fire station from Lawrence Township in a merger with the Indianapolis Fire Department. As a part of the deal, the city acquired $1.5 million to pay for salaries and benefits of those firefighters. That, however, was a one-time federal grant that was depleted in 2011. “The former mayor and the former council never put in place a permanent source of revenue (to pay for the firefighters),” Johnson said. Diller said the city continued paying for the firefighters by taking $1.6 million annually from its reserves with not enough outside revenue coming in.

If the city is over-spending, that does not necessarily mean that it is over-spending on its core functions. This is a good time for Lawrence to review its spending structure, especially in departments outside of public safety. Economic development tends to be an inefficient way to spend taxpayers’ money – it is rare that economic development spending pays for itself – but regardless of what priorities the city council ends up making, it owes its taxpayers to use all of its rainy day funds before cutting core government functions.

This is, again, a matter of principle. Rainy-day funds do not grow out of thin air. They grow from deposits made out of current tax revenues. To afford to build these funds, governments must tax us in excess of its current operating costs. We as taxpayers – whether in Topeka, Kansas or Lawrence, Indiana – deserve to enjoy the benefits of that rainy-day fund before being asked to accept cuts in government services. Let’s keep in mind that when government makes its cuts, it does not cut the cost of government to taxpayers: the residents of Lawrence still pay the same taxes even as the city cuts public safety services.

If the city is not going to use rainy-day funds to protect its core functions – then what is the city going to use those funds for? So long as they prefer spending cuts in core functions to the use of those funds, they are shortchanging taxpayers. That is neither fiscally nor morally sound.