Scottsdale staff outlines fund-balance rules, warns reserves below 20% risk rating downgrade

Sonia, budget staff, told the Scottsdale Budget Review Commission on March 19 that —fund balance— includes reserves, contingencies, restricted, assigned and unassigned balances and that each component serves a different purpose.

The presentation explained why the city keeps reserves: to maintain services during revenue shortfalls or emergencies, meet debt covenants and support the city's bond rating. Sonia said, —Rating agencies consider fund balance and reserves of utmost importance for a financially sound and strong city.—

The city's council-adopted reserve policy sets the general fund target at 25% of operating expenditures (5% emergency reserve and 20% operating reserve). Staff noted that Fitch Ratings had told the city its general fund reserves sustained below 20% could prompt a downgrade; Moody's and S&P use comparable tests. Sonia said the city also applies a GFOA (Government Finance Officers Association) risk-based analysis, which supports a roughly 25% reserve recommendation for Scottsdale's assessed risk profile.

Commissioners pressed staff on two recurring points: how the city replenishes reserves when used, and how the city treats —excess— revenues. Sonia said the city policy requires replenishment of reserves used back to policy levels within two years. She also said council policy does not automatically place unanticipated —bonanza— revenues into reserves; excess funds are frequently directed to one-time operating or capital needs instead.

Staff reviewed distinctions between reserves and contingencies. Reserves are —rainy day— funds for extraordinary events, while contingencies are set aside for unplanned but ordinary-course needs (for example, a midyear storm-repair appropriation). Sonia said the grants fund carries a relatively large contingency (listed in the presentation as $10 million) because the city often needs budget authority before grant awards are received.

Commissioners requested additional transparency on several items: a roll-forward showing how fund balance and contingencies have moved during the fiscal year; an itemized view of assigned funds (for example, pension-related assignments); and a clear display of the unrestricted fund balance available for policy choices. Chair David Smith asked staff to provide answers compiled for distribution at the next meeting; Sonia said the team hopes to deliver those documents for the March 27 meeting.

Why this matters: reserve policy influences the cost of borrowing and the city's ability to maintain services in a downturn. Commissioners signaled they want a follow-up showing transactions that created the current fund-balance picture so they can assess tradeoffs between reserves, operating priorities and capital spending.

Staff evidence spans the presentation and Q&A during the chair report and fund-balance slides; staff said council-approved reserve levels and a Fitch opinions letter inform the advice presented to the commission.