That is a question that management of many governmental entities asks. Governmental entities also have another layer of complexity in determining appropriate levels of cash reserves due to the fact that there are many different funds within a governmental entity. For example, a governmental entity may have General, Special Revenue, Debt Service, Capital Improvement and Enterprise Funds. A certain level of cash reserves for one fund will not be sufficient for another fund. For most governments, the main focus of attention by management is on the liquidity of the General Fund and Enterprise Funds.
Unfortunately, there is no one answer that can be applied to all governmental entities or governmental funds. The Government Finance Officers Association (GFOA) issue what is called “Best Practices and Advisories” that can be used to assist the management of governmental entities in establishing good policies and procedures in specific financial areas. One of GFOA’s “Best Practices and Advisories” relates to the appropriate level of unrestricted fund balance in the General Fund. Many officials and managers relate the General Fund’s “fund balance” amount as their approximate level of available cash reserves. The adequacy of these cash reserves needs to be based upon each government’s specific circumstances. Factors that should be considered when evaluating the appropriate level of cash reserves should be laws, regulations, economic times, short-term/long-term projects and the timing of the inflow and outflow of resources. Even though no two entities are the same, GFOA recommends maintaining a minimum of two months of General Fund operating revenues or expenditures as a level of cash reserves in the General Fund.
Another “Best Practices and Advisories” that the GFOA has recently issued is the appropriate level of working capital in the enterprise funds. The GFOA provides guidance for management to consider when determining the appropriate level of cash reserves. They suggest that the minimum level of cash reserves for each enterprise fund should be no less than 45 days of annual operating expenses but should be customized for each government. When customizing, governments should start with a baseline of 90 days of working capital and adjust it based on the particular characteristics of the government. Characteristics to consider in determining the appropriate level of cash reserves is the support from the general government, transfers in/out, cash cycles, customer concentration, demand for services, control over rates and revenues, asset age and condition, volatility of expenses, control over expenses, management plans for working capital, separate targets for operating and capital needs and debt position.
So, the answer to the question regarding the appropriate level of cash reserves is “it depends”. You can find more information about these “Best Practices and Advisories” on the GFOA’s website www.gfoa.org.
By Marilyn Mays, CPA