Denver’s shrinking reserve fund needs to be refilled, city CFO says

Without Denver’s robust general fund reserves, the coronavirus pandemic and subsequent economic slump would have wiped out a substantial portion of city services, Chief Financial Officer Brendan Hanlon said.

That safety net has proved its worth time and time again, Hanlon said, and should the virus spike again late this year or in 2021, Denver will have an estimated $163 million as a fallback.

But that cushion is well below what it had been in the spring and isn’t enough to cover the entire $190 million shortfall expected for Denver’s tax revenue next year. Nor should it be leaned upon lightly, Hanlon said.

Rather, Hanlon said city officials should strategically refill that account, relying on the emergency cash only in the case of another surge of the coronavirus pandemic.

“The fourth quarter of this year and the first quarter of next year are going to determine how optimistic we should be going forward,” Hanlon said. “When you lose so much of your revenue base it takes you longer to recover. I think this will be over multiple years, over multiple budgets.”

At the start of the year, the city’s general fund reserves held about $257 million, or about 17.1% of the general fund budget, Hanlon said.

City officials aim to keep about 15% of the general fund as reserves, said Department of Finance spokesperson Julie Smith. That policy dates back at least to 2005, she said.

As the pandemic began to take its toll on the local economy, Hanlon and others projected a $220 million revenue shortfall, enough to drain the budgets of about seven city departments. So city officials used about $94 million worth of reserves as well as spending cuts, hiring freezes and other contingency funds to balance the budget.

For reference, during the Great Recession the city dipped into the reserves, as well, using about $40 million in 2010 and $9 million in 2011, Hanlon said.

As he released his proposed 2021 budget last week, Mayor Michael Hancock said that this year’s economic hit is two or three times worse than the Great Recession. And the need for the city’s reserves has been proportionate.

“When I came in in 2011, we were already into the bone marrow. We couldn’t go in any further,” Hancock said. “Well, folks, we’re in the bone marrow in a matter of six months.”

The $163 million remaining in those reserves could still be used as a fallback for the ongoing recession, which will likely bring budget cuts to Denver for the next several years, Hanlon said. But the rainy day money should only be tapped in the case of emergencies, like another massive and unexpected drop in tax revenue.

The shortfall expected for next year is substantial, but the city’s economy seems to be slowly balancing out without the immediate need to dip deeper into reserves, Hanlon said. Relying on that fund too heavily in the short term would diminish the city’s safety net for more catastrophic emergencies.

Currently, reserves sit at about 12% of the city’s general fund budget, Hanlon said. Dipping below 10% would be considered the danger zone, he said.

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