Stress Testing Your Reserves with Advanced Analytical Techniques

Source: Shayne Kavanagh, Government Finance Review, June 2019

Financial reserves, or “rainy day” funds, safeguard local governments against budget-straining risks like recessions or extreme events that demand a quick and decisive public safety response. The perennial question local governments have about reserves is how much is enough. Too little and you may be underprepared for the risks you face, but too much may mean you’re overtaxing the public or failing to make investments in needed infrastructure or services. …. GFOA recommends maintaining general fund reserves equal to two months of operating revenue — or, put another way, equal to 16.7 percent of annual revenue. ….