Association for Public Policy Analysis & Management

The effect of the 2008 economic downturn on the financial position and fluidity of municipalities has highlighted the significance of contingency or budget stabilization funds, as these funds are the key to financial smoothing during times of economic duress. While professional organizations and agencies such as the International City/County Management Association (ICMA), the Government Finance Officers Association (GFOA), and the Governmental Accounting Standards Board (GASB), as well as the various state comptroller’s offices, strongly recommend establishing a budget stabilization fund, disparity exists on how to determine the level of funding for budget stabilization. These organizations also provide little guidance on structuring a customized and functional budget stabilization fund policy.

To date, a uniform risk benefit analysis standard is not established to guide municipalities considering building contingency funds into their general budgets. On average, municipalities utilize 11.58 percent of unassigned fund balances with a range of 44.93 percent, indicating a need for proper risk assessment (Tomes, Berger, & Bassett, 2011, p.46). Evaluating risk and need using uniform criteria will ensure that municipalities have the opportunity to make well-rounded decisions and manage a contingency fund balance appropriate for their fiscal wellness. To understand the extent and ramifications of the disparity and lack of guidance, we need to examine the current municipal trends in budget stabilization funds, the prevalent recommendations for both establishing policy and fund levels, and determine the feasibility of these recommendations.

In this study, we examine four budget stabilization fund policy options with the intent of determining which of these is the most feasible and beneficial. The we assess the status quo and compare it to three main policy options which are, reviewing and strategically aligning current budget stabilization fund policy, the two-month contingency fund model, and the triple-A risk assessment framework. Guided by the assumption that informed policy must be individualized to the community it will affect, we evaluate each option based on accuracy, cost-effectiveness, data availability, difficulty, support, and transparency.

Reflecting on professional organization and agency best practices papers, existing municipal policies, and industry publications with regard to budget stabilization funds, this paper recommends a two-prong approach to restructuring ineffective budget stabilization fund policies and determining municipality specific fund levels. A well-managed and planned contingency fund has the potential to act as a valuable mechanism, which can leverage a municipality from precarious financial situations.