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General fund spending decisions create strain

Public entities and institutions are looking carefully at their General Fund spending lately. That’s due in part to sunset clauses on federal relief dollars that came from the American Rescue Plan Act and other COVID-19 relief legislation. While many entities maintain a significant fund balance, others are finding their finances to be uncomfortably short, due to unwise budgeting and spending policies.

For example, the city of Dallas, OR is rethinking its spending policies after facing the reality that their budget includes a structural deficit. Dallas is about 15 miles west of Salem, but that proximity hasn’t spared the City from a looming budget shortfall. City Manager Brian Latta knows exactly why the city’s general ledger isn’t looking so good. Latta points the finger at the City’s decision to pay capital costs from its operating dollars.

Until now, the federal relief dollars have buoyed that approach, but their discontinuation has revealed exactly what Latta and others didn’t want to see: spending that outpaces the City’s revenues. It doesn’t help that the City’s projected capital expenditures will be twice as much as normal in the coming years. Inflation, planned capital expenses, changes to Oregon’s tax laws, a shrinking tax base, and increased demand for services that the City pays for using operating dollars will all place additional pressure on the general fund. It also doesn’t help that the City’s population has grown by 18.5% over the last decade, but the city’s tax revenues have not followed suit.

The City expects to drop into deficit spending in FY 2025. By FY 2027, the deficit would reach $4M, if nothing changes.

Protecting the general fund as a starting point

The failure to adequately fund capital projects through standard mechanisms (like tax-backed bond issues) destabilizes the entity’s general fund. But even when dipping into the General Fund doesn’t lead to immediate deficits, it reduces the entity’s ability to respond to changes in the economy. Inflation, for example, has reduced the overall spending power of the dollar. Sustained inflation means that publicly funded entities will likely need to get by with less. That’s hard to do when the General Fund has been obligated to capital projects and loans.

Using the General Fund for expenses that are typically budgeted elsewhere limits the options an entity has when economic conditions either change rapidly for the worse, or additional expenses appear without a corresponding increase in revenues.

Taxpayers rely on their elected officials to make good spending decisions. Using the General Fund to pay for loans and capital expenses generally aren’t among those.

Photo Credit: 401(k) 2012, via Flickr