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Episode 6 Ridley Park Financial Stress - Reserve Fund Balance

Episode 6 - Reserve Fund Balance

The council that was in place in the 1990’s managed to build up the Reserve Fund of $1,245,835. This was achieved by holding expenditures to much less than revenues. In the long run this is not the best policy since Taxpayers are entitled to having improvements in services and borough features in proportion to the taxes they are paying. However, it is important to maintain a reserve that is sufficient to deal with emergencies.

A more equitable Reserve Fund Balance is somewhere between $1,245,836 and about $350,000. The deficit spending that occurred between 2001 and 2007 was in the right direction but went far beyond prudent fiscal boundaries. The expenditures should have been more restrained or there should have been relatively small additional tax increases when the major capital expenditures were made. It is easy to sell projects to taxpayers when there is no increase in taxes. Council simply spent the savings account that had been accumulated in the 1990’s. In real life finance, this is a pay me now or pay me later proposition. Ridley Park has reached the pay me later phase and now must tighten up and pay up.

At the end of year 2007 Reserve Fund level of $335,914 Ridley Park was close to zero unrestricted reserve. At that level, the funds are tied up in accounts receivable, restricted grant funds and Liquid Fuel Tax funds.

At year end in 2007 accounts payable that should have been paid in 2007 stood at $333,382. A healthy accounts payable would be about $50,000 or less.

Common symptoms of a financially distressed Municipality that is suffering from a structural operating deficit are:

  • Deficit spending for more than a 3 or 4 year period of time
  • A reserve fund that has been drawn down to near zero
  • High accounts payable at year end
  • Recent large growth in debt and debt service

At the end of 2007, Ridley Park had all the common symptoms of a financially distressed Municipality that is suffering from a structural operating deficit.

On December 31, 2007 Ridley Park’s financial Audit’s showed:

  • Deficit spending of $918,921 over the prior 7 years
  • The unrestricted reserve fund had been drawn down to less than the Accounts Payable on December 31, 2007
  • Accounts payable at year end were at a very uncomfortable level of $333,382
  • Debt had increased from $861,844 in 2002 to $2,574,479 in 2007
  • Debt service had increased from $92,741 in 2003 to $666,651 in 2007. In 2008 it was discovered that the situation was much worse than the above symptoms imply. Watch for Episode 8 for the description of the “Brink of the Abyss.

Who is responsible for this financial situation. That is easy to answer - the voters are responsible. As one resident said in the last Council Meeting on March 16, 2010, Ridley Park reminds him of the imaginary town of Mayberry R.F.D. We all agree that Ridley Park is fine place to live. But, we did not take the time to learn what it was costing us. Once again I remind you of the "Pay me now or pay me later Syndrome" that is now on our doorstep.

In 2008 prudent financial management returned and a surplus of $7,284 was booked and the decline in the Reserve Fund Balance stopped. This success required extraordinary efforts and prudent financial management by Council. These measures will be described in Episode 9. Stay tuned.

Charts will be updated for 2009 when Auditors' report is released in April 2010.

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