The wisdom of keeping a reserve fund is sound – you never know when you’ll be in the middle of a supply shortage that leads to price spikes, be hit by a disaster that necessitates extensive system repairs, or have a large portion of your customers facing hardship in paying their bills.
Over the past few years, many utilities have faced at least one, if not multiple of these scenarios. From the many utilities affected by the price spikes resulting from the cold weather event last winter in Texas and the South-Central U.S. to an uptick in extreme weather events and the enduring affects of the pandemic on the economy, the case for building up – and dipping into – reserve funds has been clear.
According to the National Conference of State Legislatures, nearly half of states dipped into reserve funds in fiscal year 2020 to make up for budget shortfalls. This includes two states – New Jersey and Nevada – that used most or all their reserve funds.
According to a Pew analysis of a report from the National Association of State Budget Officers, state rainy day funds collectively fell by $1.3 billion in fiscal year 2020, with 13 states reporting a decrease in the amount held in rainy day funds. Despite recently tapping into these funds, many states have been quick to rebound their financial situation and restore the funds. The NASBO report noted that 28 states expected to see their rainy day fund balances to grow in fiscal 2021 from the previous year, with a total national net gain in these funds of about $4.6 billion, which would bring the total to a new high mark of about $82.3 billion.
States turned their financial outlook around due to factors including federal aid for individuals and businesses, and a rebounding economy that brought in more tax revenue. When rainy day funds combined with ending balances, states’ total balances were also expected to hit a new high, with more than $126 billion. Pew reported that this meant at the end of fiscal 2021, states had enough to cover a median of just over 55 days of operating costs – almost twice as long as the median of 28.9 days accrued pre-pandemic, and more than three times the median of 17.3 days states had allocated prior to the Great Recession.
The Government Financing Officers Association recommends that municipal governments, regardless of size, maintain at minimum an unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures. GFOA further advises that “governments that may be vulnerable to natural disasters, more dependent on a volatile revenue source, or potentially subject to cuts in state aid and/or federal grants may need to maintain a higher level in the unrestricted fund balance.”
Following an analysis in 2015, Pew put forth three factors that can help entities set a target for rainy day funds. These include:
- Defining the purpose for the funds (i.e., when they can be used, what they are for)
- History of revenue volatility
- Risk tolerance
For public power utilities, establishing and maintaining a healthy reserve is in part about educating and communicating with the governing board. It can also be about how the funds are described and considered.
In Massachusetts, the towns of Middleborough and Lakeville faced significant damage during a blizzard in 2013. Middleborough Gas and Electric Department, the local public power utility, was able to restore customers’ power and repair damaged circuits quickly thanks to mutual aid and other preparedness activities. The storm was costly – with recovery expenses exceeding $840,000. Jackie Crowley, general manager for MGED, noted that the utility was able to get many of the costs reimbursed through the Federal Emergency Management Agency, thanks to keeping strong records, but that the event got the utility on a path to budgeting recovery funds for future storms and investing in resilience efforts. In addition, MGED’s Light Board had approved a Rate Stabilization Account for electric and gas costs that exceed budget forecasts due to extreme weather or market spikes for the small unhedged portion of the portfolio.
“When we have situations that present challenges, like a summer hurricane or winter storm, we go over that info at our commission meeting and talk about what key issues were and how we responded,” said Crowley. “That lays the foundation as we get into the budgeting process for how we’ll improve resilience in future years.”
Crowley noted that utility managers work closely with the Middleborough’s Light Board throughout the budgeting process. She stressed the importance of communicating that the public power utility is a valuable town asset, and that investment in the utility is for the long-term benefit of residents and the local economy.
“We present these investments as things that are not really discretionary … You have to invest in reliability, plan for future growth, improve energy efficiency and strive for a decarbonized energy portfolio to meet community needs for the long term,” said Crowley. She noted that MGED has worked hard to ensure that resilience investments have not affected customer rates.