Local Government Reserve Funds: Policy Alternatives and Political Strategies

Local government officials are operating in a policy void when it comes to the establishment and use of reserve funds. In part, this is due to confusion about the distinction between reserve and contingency funds. The limited research that has been conducted shows that relatively large sums of money are maintained in reserve by many local governments. Some governments refer to these sums as reserve funds and their intended use is clearly indicated in one or more local documents, such as a budget or audit/financial report. Others simply maintain an unreserved fund balance. This article identifies rationales for using reserve funds, discusses the alternative ways reserves are accumulated, and outlines key issues a local government financial plan should address when reserve funds are utilized.