General Fund Reserves Help Boost Bond Ratings

Thursday, January 14, 2016

Since the recession of 2008, economic conditions have fluctuated between adequate and poor for the City of Elgin, Illinois, but it has been able to stabilize its bond rating through strong financial policies – most notably, those governing its general fund reserve levels. In fiscal 2009, on the heels of the largest economic downturn in recent history, Elgin’s revenue picture looked uncertain. The city had demonstrated sound financial stewardship but couldn’t escape the impact of broader, nation-wide, economic conditions. And despite cutting spending by approximately 10%, as well as adopting a new service delivery model, Elgin was worried about its bond rating – the city simply wasn’t in a position to absorb increased borrowing costs.

The Finance Department therefore identified several financial objectives for the coming years and drafted them into formally adopted financial policies. One objective was to maintain or upgrade Elgin’s bond rating by Standard and Poor’s (AA+), Fitch Ratings Services (AA+) and/or Moody’s Investors Service (Aa2). Making such an explicit statement provided focus, giving the city a clear and easily quantifiable target.

Determining how to achieve this goal was the next step. The city met the challenge by creating additional policies requiring the city to keep cash reserves at 16% to 19% of annual expenditures. The commitment did not go unnoticed by the rating agencies, untimely resulting in the city gaining AAA status on its general obligation bonds from Fitch Ratings in 2015. Among the positive factors the agency noted were “very strong liquidity in unrestricted government cash and short-term investments” and “very strong budgetary flexibility [due to] available reserves.” The rating agency’s Financial Management Assessment methodology also found the city’s management conditions to be very strong because of it financial policies and practices.

For more information on Elgin’s financial policies and bond rating, please visit the city’s website.

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