What should be done with the city of Sedonas $9 million reserve?

by Paul Chevalier

Editors Note: Chevalier is the Chairman of Sedonas Art and Culture Commission. He is a retired Senior Executive of a major retailer where he was responsible for law and personnel. He holds a Degree in Government from Columbia College, a Law Degree from Columbia Law School and Business Degrees from both Columbia and Harvard Business Schools.

Our city government has a $9 million assets reserve in its general fund. In my opinion, having this large a reserve is not in the best interests of the people of Sedona. For an explanation of this opinion, it will take a few minutes of your patient reading.

In about 1995, our City Council took a hard look at the amount of money our city had in its general fund reserve, and concluded (correctly, I think) that our citys reserve at that time was inadequate.

I have been told that in 1995 our citys general fund reserve was in the range of $1 to $1.5 million. Our city staff, at that time, was instructed by the Council to budget conservatively, so that each year money would be added to the city general fund reserve. The staff did what it was told, and today our city reserve stands at more than $9 million.

Our annual City General Fund budget is approximately $7.5 million. This means that the general fund reserve equals 120 percent of the annual budget.

How much is enough?

The question is: How much money should the city of Sedona have in its general fund reserve?

I presented this question to Eric Levitt, who is not only our city manager but also functions as our citys chief finance manager. Mr. Levitt did not personally take a position on this question, other than to say that he believed that our reserve was larger than it needed to be. He did tell me that a commonly used rule of thumb is for a city to try to have a reserve equal to 50 percent of its annual budget, and, in addition, to have an adequate reserve for interest due on city bonds.

One-half of Sedonas annual budget is around $3.75 million, and, according to Mr. Levitt, an adequate reserve for interest on Sedonas bonds is around $500,000. If Sedona was to adopt this rule of thumb, then our general fund reserve for this year would be sufficient at $4.25 million.

What are the advantages of Sedona having an adequate reserve? I can think of three.

1. With an adequate reserve, our city doesnt have to worry about having money for budget overruns or emergencies.

2. Citizens do not have to worry about being taxed to pay for needed funds.

3. Holders of our wastewater bonds and other debts do not have to worry about the city having money to pay interest and principal when it comes due.

These advantages are important. The real question is how much of a financial reserve does our city need to keep these advantages? Maybe the answer is $4.25 million, using the above approach. Perhaps there is a better way of determining an appropriate reserve. My point is that a method of determining an appropriate reserve for Sedona should be agreed upon by the City Council and the Council should then use the excessive reserves we have wisely.

As you can imagine, Sedona has many bona fide uses for excessive reserves. Three come to mind. No doubt many of the readers of this article can add to this list.

1. Use some or all of the excess reserve to pay off some of our citys $70 million debt. The money we have in our city reserve earns us less than two percent interest, because of government restrictions on how cities can invest money. Meanwhile, city-owed debt that could be paid off is costing our city around five percent interest.

And saving interest is not the only reason to retire debt. In my opinion, Sedonas total indebtedness is too high. Sedona has the dubious distinction of having the highest per capita debt of any city or town in Arizona. Each of us needs to decide how we feel about this. It makes me uncomfortable.

A note to the positive. . . I have been told that the city is seriously considering using $1 million of its reserve to pay off the remaining purchase price for the land recently acquired to create the Uptown parking lot. (Note: If our city government does not do this, then our city debt will increase by another $1 million.)

2. Use some of the excessive reserves to increase government financial support to existing important community services. I believe that it is the opinion of most of the citizens of Sedona who think about these issues, that the city government does not give enough support to existing important community services, particularly our Sedona Public Library and Sedona Humane Society.

Sedona has increased library financial support in its most recent budget, but our city governments percentage of financial support is still far below practically any other city or town in Arizona that has a library.

3. Use some of the excessive reserves to help pay for additional community services that Sedonas citizens want. This is a tricky area. Sedona voters, earlier this year, substantially defeated a proposal for financing a recreational center, which was endorsed by the city council. That proposal had little private funding and was far too costly to the city.

The voters of Sedona do focus on financial issues and will reject proposals that are not well conceived. I do believe that the citizens of Sedona want more community services provided that the city financial involvement is realistic. I believe that city financial participation in a scaled-down version of a recreation center and/or financial participation in a well-planned indoor performing-arts center would have support from our citizens. Some of the excessive reserves should be earmarked to help support (along with private donations) carefully thought-out and financially sound projects of this nature.

Setting priorities

A new city council term has just begun with some new council members starting their terms. Now is a good time for the City Council, in conjunction with the city manager, to make it a priority to determine: a) the appropriate amount of money to keep in reserve, and b) what to do with the excessive reserve funds that are on hand.