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Savings Accounts of Chicago Area Governments

April 06, 2011

The Civic Federation analyzes the budgets of nine Chicago area local governments. One important indicator that the Federation utilizes to assess the financial health of these municipalities is their fund balance level. In particular, we examine the balance within the general fund that does not have any external legal restriction, called the unrestricted fund balance. Fund balance differs from net assets typically reported by business enterprises in that it includes only a subset of assets and liabilities and is more a measure of liquidity than of net worth.[1] The fund balance can be thought of as the government’s savings account.

This blog entry summarizes the status of fund balance levels for the units of local government analyzed by the Civic Federation for which comparable data were available.[2] The analysis is based on audited financial statements and does not consider the planned use of fund balance in fiscal years 2010 and 2011. The Civic Federation analyzes fund balance in two ways: (1) total unrestricted fund balance and (2) the fund balance ratio. The fund balance ratio is the fund balance as a percentage of expenditures and is a common metric utilized by public finance analysts.

It can be appropriate to use fund balance during an economic downturn to address short-term revenue fluctuations in the same way an individual might dip into savings when experiencing a disruption in income. However, it is important to keep in mind that although the economic recession began in December 2007[3] there is typically a two-year lag time between economic conditions and cities fiscal conditions.[4] Therefore, failure to maintain adequate fund balance levels prior to FY2009 is particularly problematic.

The chart below shows the changes in unrestricted general fund balance for six Chicago area governments over five years. The City of Chicago had the biggest decline, plummeting 95.4% from $57.6 million to a nominal $2.7 million. Cook County also had a downward trend in fund balance, declining 35.8%. DuPage County has had a steady upward trend in fund balance, climbing 59.3% over five years. The other three governments all had highly variable fund balance levels from year to year, but ended FY2009 with fund balances well above FY2005 levels.

The next chart shows the fund balance ratio for each government. The Government Finance Officers Association (GFOA) recommends “at a minimum, that general-purpose governments, regardless of size, maintain unrestricted fund balance in their general fund of no less than two months of regular general fund operating revenues or regular general fund operating expenditures.” [5] Two months of operating expenditures is approximately 17%. GFOA notes that a smaller size reserve may be appropriate for the largest governments. GFOA also recommends that governments adopt a formal, publicly available fund balance policy that takes into consideration the government’s own specific circumstances.[6]

The City of Chicago had by far the lowest fund balance ratio with less than a tenth of a percent of expenditures. The City often notes that it has a separate $500 million in long-term reserves from the Skyway asset lease transaction. The City’s asset lease reserves can provide added liquidity. However, they are not a substitute for a general fund balance for a variety of reasons including that the interest from the long-term reserve was intended to provide an ongoing source of revenue for the general fund and because the principal is restricted[7] (the GFOA standard refers specifically to unrestricted balances).

Considering the large size of Cook County and Chicago Public Schools, levels of fund balance below the GFOA target may be appropriate. However, the downward trend of Cook County’s fund balance should be closely monitored. The Chicago Park District has grown its fund balance ratio to near the GFOA recommended level. The higher ratios for the Forest Preserve District and DuPage County may be partially explained by interfund transfers. Some governments transfer out a significant amount of general fund resources to other funds of the government. In those situations the general fund expenditures do not reflect the full burden on the general fund.

For more on the issues affecting the fund balance levels of the various units of government, please see the Civic Federation budget analyses.


[1] Stephen J. Gauthier, The New Fund Balance (Chicago: GFOA, 2009), p. 9.
[2] City Colleges of Chicago, Metropolitan Water Reclamation District and Chicago Transit Authority financial statements differ from the other local governments. They report net assets instead of fund balance consistent with full accrual basis of accounting. The other governments utilize modified accrual accounting to report governmental fund activity.
[3] The National Bureau of Economic Research announced on September 20, 2010 that the recession that began in December of 2007 ended in June 2009. National Bureau of Economic Research, http://www.nber.org/cycles/sept2010.html (last visited on March 29, 2011).
[4] National League of Cities, City Budget Shortfalls and Responses: Projections for 2010 and 2012, December 2009.
[5]Government Finance Officers Association, Appropriate Level of Unrestricted Fund Balance in the General Fund (Adopted October 2009).
[6] Government Finance Officers Association, Appropriate Level of Unrestricted Fund Balance in the General Fund (Adopted October 2009).
[7] City of Chicago, FY2009 Comprehensive Annual Financial Report p. 51.