When One Budget Closes Another One Opens (But Where’s the Cash?)

It may seem too soon to be discussing budget questions on how to deal with your ending cash balance, or maybe too late; but, we’re still asked about the proper way to handle some of the uncertainty around prognosticating how much you expect to have at the end of one budget cycle and the beginning of another. This has been especially vexing for the last few years as mayors, city managers, and finance directors have been looking under the seat cushions for loose change to balance their budgets.

In bygone days, some agencies could afford to let a department that had accumulated savings during the year carry over some of it for unexpected exigencies, but no more. Not only is this unlikely due to the fiscal realities of the times, but it is poor public policy. Strictly speaking, one might even argue that it is illegal, given the opening lines of RCW 36.40.200, RCW 35.33.151, and RCW 35A.33.150 stating, “All appropriations in any current operating fund shall lapse at the end of each fiscal year.” The statutes do allow for the reality that operations simply don’t end with the new fiscal year; they allow exceptions for ongoing capital projects and provide a means to pay for things “in the pipeline”—things ordered but not delivered by year-end.

Trying to establish a responsible estimate of ending cash balance is not easy. It requires candid, two-way communication between your finance staff and operations staff so that an honest presentation can be made to the elected officials and to the public. Because the statutes allow some latitude so that each agency can respond to its own circumstances rather than apply a hard and fast rule, the best approach is one that is as transparent and easily explained as you can make it. If you can’t explain it clearly, you need to reconsider your policy.

This isn’t easy work, especially in complex organizations, but it’s essential. In the fiscal climate of the day, while you’re looking for every dime, so are your tax and ratepayers. Unexplainable carry-overs from year to year are fair game for criticism.

So, is it too late or too early to be talking about budgeting unencumbered cash and when known unencumbered cash carry-overs should be reflected in the budget under consideration for the ensuing year?

It’s never too late or too early to address this question. Your staff needs to know what the rules are from the beginning and understand how you will be dealing with the year-end issues so that the two-way communication between finance and operations becomes routine and not just a once a year exercise.

The beginning of the year is also a good time to explain to the elected officials that there will always be some variance between the estimates of ending cash balance and the actual beginning cash balance at the start of the year, simply because of the timing of invoices from vendors, unexpected expenses near the year-end, or expected expenses that are not incurred. Then at budget time, unencumbered funds should be shown as early as practical since they are part of the revenue available for the next year. This is obviously more important if the amounts are significant and less so if they fall within the plus or minus amounts that may be needed to finish the year. This is where a candid relationship with department directors and managers pays off so you can estimate as accurately as possible what they'll need to close out the year.