City looks to use reserves as tax revenue falls

After almost seven years of saving money and not adding to the city’s debt burden, Mobile might have to dip into the reserves it has built up in order to make it through the economic crunch caused by the coronavirus pandemic. 

Using a model employed by a New York City comptroller’s office, Mobile’s Executive Director of Finance Paul Wesch has estimated the city could see a roughly $7.2 million decrease in sales and lodgings tax revenues over the next two months. On average the revenue in March is around $23 million. 

“Most of what we’ve seen from forecasts about how long we’ll be in this was two months,” Wesch said. “It seems like the plurality of those forecasts is two months.” 

With a reserve of some $63 million, and if the forecasts pan out as to the amount lost each month, Wesch said the city could pay operating expenses for up to eight months without making drastic cuts. 

“If we stayed in our current situation, given our reserves, we could hold steady for eight months,” he said. 

A rough guideline for cities Mobile’s size is to have two months’ worth of operating expenses in reserve. Wesch said the city achieved that about a year ago and has been building it up more since that time. 

“We added to it over fiscal year 2019,” he said. “Operating expenses are between $21 million and $23 million in the general fund. That means all salaries are paid.” 

Wesch said cities develop reserve funds for three reasons: a natural disaster, a man-made disaster or a sharp decline in the economy, like what is happening now. 

If city leaders don’t build a reserve when they can, those leaders have to “hope things continue to go well,” Wesch said. 

“Hope is not a strategy,” he said. “It’s like performing on a highwire without a net.” 

That’s why in 2014 Mayor Sandy Stimpson began imploring department heads and Wesch to save money for a reserve. 

“The mayor saw a gap in our financial profile and felt we need to establish a reserve,” Wesch said. “We started doing some things that required some discipline in the operating budget.” 

The restraint has not only led to a reserve fund, but has allowed the city to cut $100 million from its debt service and unfunded liability. 

The focus for the city now and in other times of crisis is basic services, Wesch said, like public safety and sanitation. 

“Those would continue as long as possible unabated,” he said. “Citizens expect us to pause others.” 

Councilman Joel Daves, chairman of the body’s finance committee and a member who has preached financial restraint in the past, is singing the praises of the city’s fiscal stewardship now. 

“Thank God we built up the reserve,” Daves said. “This is an example of the kind of place you get to when it’s appropriate to use reserves.” 

As he has been known to do previously, Daves reiterated the importance of building up reserves during good economic times because they don’t last forever. 

“You don’t want to get into a position where you spend up reserves in good times,” he said. “Inevitably, there will be bad times. It seems there are bad times about every 10 years or so.”