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The Lane Report

Rainy-day Fund: Lexington’s Financial Security
is the Urban County Council’s Top Priority

Lexington’s Urban County Council is elected to represent the citizens and taxpayers of Fayette County. I believe most Lexingtonians expect local government to carefully invest their tax dollars, be fiscally conservative, and save surplus revenues for use in an emergency or major economic downturn. The financial security of our city is the council’s top priority.

Last month by a vote of 13-1 and after an extended period of evaluation, the city council approved a revised economic contingency account – the “rainy-day fund”. The fund’s targeted balance is set at ten percent of the city’s general fund revenues or about $25 million. It may take a decade of savings to reach the targeted balance.

The newly revised ordinance authorizes depositing about one million dollars annually into the fund (cash and interest earned) and 25 percent of each year-end budget surplus, if there be any. The amount of the annual rainy-day fund allocation is about 0.4 percent of general fund revenues.

Why is the rainy day fund essential? Here are a few examples –

• Lexington is self-insured. All healthcare, disability, liability and casualty insurance claims are paid by local government on a “pay as you go basis.” When a claim is made to the urban county government for an insurance benefit or loss, no cash to pay the claim is reserved. Lexington’s June 30, 2005 financial statement estimates that the city is liable for $16.5 million in future settlement payments for insurance claims already made.
  
  The rainy-day fund is the major cash reserve that will cover a shortfall in these day-to-day costs of local government, as well as, extraordinary catastrophic losses to the city’s property and / or real estate facilities caused by weather, accident, terrorism, fire, earthquake, etc.
  
  
• Lexington’s Police and Firefighter’s Pension Fund has a long term unfunded actuarial accrued liability of $165.2 million. The current portion of this liability is $19.1 million based on the city’s June 30, 2005 financial statement. The rainy-day fund would also serve as an emergency reserve for this pension fund.

• Lexington had $263.4 million in bond debt on June 30, 2005. The rate of interest paid on bond debt is based on a number of factors – one of which is the amount of cash in the rainy-day fund. Even a small increase in bond interest rates – which may be caused by taking money out of the “rainy-day” fund – can be a significant cost in financing local government’s capital improvements.
  
  
• Lexington’s current rainy-day fund cash balance is $8.0 million. Each day, Lexington spends over one million dollars to serve taxpayers and operate our city. The current fund balance equals only eight days of operating expenses.

Mayor Teresa Isaac estimates that FY 07 general fund revenues will increase by $9.7 million and that a $7.0 million surplus will exist at the end of this fiscal year (June 30, 2006). Of course, as we know from past experience, actual tax revenues and budget surpluses are often considerably higher than the mayor’s estimates. Should Lexington take money out of the rainy-day fund when our government has a budget surplus and projects an increase in revenues for the coming year?

What will local government do when the next economic downturn occurs? If there are limited cash reserves in the rainy-day fund, the only options left for local government are to reduce services and personnel, increase borrowing, and/or pass a tax increase. None of these options is attractive to the city’s employees, taxpayers, or those persons and organizations receiving financial assistance or aid from city government.

Mayor Isaac’s FY 07 proposed budget takes $4.0 million from the “rainy-day” fund and eliminates any payments into the fund. This action will reduce the fund’s minimum anticipated balance at the end of next fiscal year from $9.0 million to $4.2 million. By comparison, the Louisville/Jefferson County Metro Government has over $64.0 million in its rainy-day fund.

The mayor’s recommendation to tap the “rainy-day” fund indicates a lack of fiscal discipline. Lexington must operate its government within the revenue it receives from taxpayers.

The Herald-Leader and Mayor Isaac have both lost touch with Lexington’s taxpayers. This issue is not “another political squabble with the mayor”. The “rainy-day” fund is a major philosophical difference between the “fiscally responsible” approach of the council and the “spend and tax” policies of the mayor. Lexington’s financial security should not be jeopardized by overspending or depleting an already severely under-funded “rainy-day” account. Ask Lexingtonians if they give the mayor an “A+ rating” regarding her recommended exploitation of the “rainy-day” fund.

Your comments and suggestions are always appreciated.




If you would like to contact Ed Lane he can be reached via at EdLane@LFUCG.com ; and by letter at 200 East Main Street, Lexington, KY 40507.

Councilman Ed Lane represents the 12 th District on Lexington Urban County Council. He is the owner of a commercial real estate services firm and publishes a statewide business magazine.

“I want to conservatively spend our tax dollars,
eliminate waste, and bring sound business ideas
to local government.”

To contact Ed Lane's 12th district council offices, e-mail him at edlane@lfucg.com.