The graph of City of Berkeley’s actual revenues and expenditures in the last six fiscal years shows revenues are less stable than expenditures. The city is forecasting costs to outstrip revenues in FY2018 and 2019 as a cyclical economic downturn hits

In perhaps the first-ever folksy moment in a Berkeley audit report, the city auditor recalls Aesop’s 3,000-year-old tale of the “Grasshopper and the Ant.” The frivolous grasshopper plays through the summer months while the industrious ant toils to store food for the winter. When winter arrives, the grasshopper starves to death.

The moral for Berkeley, according to City Auditor Ann-Marie Hogan? Seize hold of the current relatively healthy economic conditions and put in place a more prudent, detailed policy for the city’s general fund reserve, often called the rainy day fund.

“Nobody wants to put aside money for tomorrow when there are so many unmet needs starting them in the face today and the residents are all clamoring for their priorities,” Hogan said. “We’ve had a couple of years of really good revenue news. This would be the time to put in place the policy.” 

Ann-Marie Hogan, Berkeley city auditor

Berkeley’s current policy calls merely for “building a prudent reserve,” which is defined as 8% of general fund revenues. The Government Finance Officers Association (GFOA) recommends a minimum reserve of 16.7% — enough to cover two months of revenues. At the beginning of fiscal year 2015, Berkeley’s rainy day fund was $31.2 million, well in excess of that recommended minimum.

Without a beefed-up policy, however, Hogan argues that the fund will be depleted and inadequate when the economic cycle turns down — forecast by Berkeley city officials for 2017. Berkeley City Council will consider Hogan’s audit and its recommendations at its meeting on Tuesday this week.

“I’m in favor of increasing the reserves,” council woman Susan Wengraf said to Berkeleyside. “It’s a sensible thing for us to do now. Everyone wants everything. We have to have some guiding principles. This is one way to say that, ‘this is our limit. We cannot go below this amount.'”

“I agree with the auditor that we need to make sure we have funding in case of an earthquake or an economic decline,” said council man Jesse Arreguín. “I’m not quite sure if 16.7% is the right threshold. We have some really critical challenges we are grappling with right now in terms of unfunded capital needs and critical needs in terms of homelessness and other problems. I don’t think it’s a good idea to limit our flexibility to use surplus funds for immediate priorities.”

The audit report recommends, in addition to the increased minimum reserve, that a new policy:

  • Identify and clearly state the purposes for which the funds are intended (which should include, at a minimum, an emergency reserve for one-time events like earthquakes and a stabilization reserve to offset economic downturns)
  • Identify and clearly state the purposes for which the funds are not allowed to be used, for example, to fund ongoing operations or to start new programs
  • Establish the method and timing for fund replenishment when funds dip below an identified level
  • Establish the authorization to access the funds (requiring, for example, a two-thirds vote or a formal declaration of a state of emergency)
  • Provide for transparency in the reporting of the general fund balance reserve

Berkeley’s current vague policy has led to the reserve fund being raided for a wide variety of purposes. In 2013, $2.4 million was used from the reserve to write-off deficits in special revenue funds. In May, 2015, the reserve was used to “forward fund” Berkeley Unified School District programs to be funded by the city’s new Sweetened Beverage Tax.

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Lance Knobel (Berkeleyside co-founder) has been a journalist for nearly 40 years. Much of his career was in business journalism. He was editor-in-chief of both Management Today, the leading business magazine...