Town Council Reduces Amount To Hold In Reserve For Emergencies. Will The Remainder Be Enough?

Savings, which are accumulated over a long time, can be held in reserve for a number of reasons, but one of the most important is that these savings are held to pay for unexpected expenditures resulting from calamitous events, such as hurricanes, floods, and economic recessions, and to cover yearly operations. These funds are held in what is called the Unassigned Fund Balance (UFB), and in 2021 the then-Town Council adopted a written Fund Balance Policy about how the money would be managed. On June 23, members of the current Town Council, with the exception of Councilor Stephen Stokes, voted to make changes to the 2021 Fund Balance Policy that will free up funds which can be used to finance budget deficits and to artificially lower tax rates rather than save the money for emergencies. Financing budget deficits and artificially lowering tax rates are unsustainable over time and will surely put the town’s taxpayers at risk of unexpected tax increases large enough to bump into the state’s tax cap.

It is important to realize that, although Charlestown has designated certain accounts to hold funds saved for planned future expenditures, such as routine dredging of the breachways, Charlestown does NOT have any account, other than the UFB, dedicated to mitigating the risk of a loss, a disaster, or another undesirable event.

Although there are good reasons to re-evaluate from time to time whether the minimum level of UFB should be adjusted, on June 23, the Town Council was unable to answer the following basic questions—questions that should be answered before any change is made:

• Will the changes they propose to the 2021 Fund Balance Policy assure, with an acceptable degree of certainty, that Charlestown will have the funds it needs to respond to emergencies for 10 years? In fact, it appeared that the Town Council was confused about historical facts and about the purpose of the 2021 Fund Balance Policy because the Town Council’s original proposal on June 23 was to reduce the minimum level to hold in reserve to 15%—very close to the level needed by the town to cover its regular operations throughout the year. Reducing reserves to 15% would have meant that there would be almost nothing available for emergencies and would be like betting that a loss, disaster, or other undesirable event will not occur in the next 10 years. Luckily, Councilor Stokes realized that the proposal did not make any sense and made a motion to set the minimum at 20% instead. However, the Council could not answer whether this percentage will be adequate either.
• What would the savings that were being freed up be used for; that is, would they be used for purposes that are sustainable over the long term—a key component of the town’s 2021 Fund Balance Policy?

It is noteworthy that, as part of a $42,000 analysis conducted in 2020–2021 (described below), the town was not only given an analysis to guide the Town Council’s decision in 2021 but it was also provided with a Risk Model that could be used to inform future decisions about how much is enough. However, when the Town Council was asked repeatedly whether it had used the Risk Model before recommending a change to the 2021 Fund Balance Policy, it was clear that they had not used the Risk Model, or that they were even aware of it.

Nonetheless, the minimum level for the UFB was changed from 23%–33% to 20%–25%. This adjustment means that the UFB can be reduced to $6 million, leaving only $1.7 million available for emergencies. The confidence level that the town will have enough will have been reduced as well.

A Little History

For well over a decade, many experts, including those on town staff, have recognized that Charlestown is especially vulnerable to more intense storms and rising sea levels as the result of climate change:

• The most recent scientific evidence of the risks posed by climate change was presented to the Town Council in December 2019 by the Executive Director of the Coastal Resources Management Commission (CRMC), Grover Fugate, who quantified the damage Charlestown could expect to see as sea levels rise and the intensity of storms increases.
• In February 2020, the town’s long-time auditor also advised that the town should look at its financial exposure to risk and probably target the level of reserves to be held in the UFB at the higher end of the 20% to 25% range being discussed.
• In January 2020, Town Administrator, Mark Stankiewicz, and Treasurer, Julie Goucher, recommended that a “Reserve Analysis, Risk Assessment, and Probability Management” be undertaken, and funding for the project was included in the budget, which was approved in June.
• In July 2020, the Town Council engaged the National Government Finance Officers Association (GFOA), a nonprofit association with a mission to advance excellence in financial management, to undertake the project.

The GFOA’s analysis, concluded in early 2021, indicated that, given certain assumptions, the town’s reserves would last for 10 years, and the level of certainty was high. However, a major assumption was that the UFB reserve in 2020 of $10.8 million would remain at that amount during the upcoming 10-year period. The analysis also assumed that there would be operating surpluses, up to 3% per year; that there would be no cuts in town services; that the population would remain stable going forward; and that future capital spending would be financed, as it had been in the past, using cash rather than expensive debt.

However, it is very clear that the assumptions behind the conclusions in the 2021 GFOA report are NOT valid in 2025. For example, as of June 30, 2024, there was $6.2 million in the UFB—significantly less than the $10.8 million in 2020. Since 2022, there have not been operating surpluses anywhere near 3%, and in fact, the Budget Commission observed in 2025 that expenses were fast outpacing revenues. The town’s population is at risk of growing significantly because of recent state legislation that mandates greatly increased densities for certain projects, and the chance of reaching 1.5 feet of sea level rise would likely be achieved in 5 years, not 10, and the town’s capital needs would be greater than assumed in 2020.

The Process

How much to reserve in the 2021 Fund Balance Policy was arrived at through an exhaustive process. The GFOA’s framework of risk assessment was based on the risk management cycle as follows: identify risk; assess risk; identify risk mitigation approaches; assess expected risk reduction; and select and implement mitigation methods. The analysis focused primarily on risk retention, or using reserves, to manage risk.

• First, the GFOA identified the risks that posed the most clear and present danger to the town. The foremost were the following:
  • Revenue loss from recessions
  • Damages from hurricanes
  • Damages from floods
  • A number of lesser risks, such as extreme snowfalls and lawsuits, were also included.
• Next, for each risk, the GFOA calculated the probability that the town would experience the risk between 2020 and 2030. Each of these risks was examined individually to understand the nature of each risk and the financial implications.
• The GFOA also considered the chance that the town’s current reserve would reach what is called the Critical Threshold each year—that is, the level of reserves below which the town would not want its reserves to fall. The Critical Threshold for Charlestown in 2020 was calculated to be $4.3 million, or 2 months of operating expenses, needed because of the mismatch between when property tax revenue is received and the relatively even rate at which the Town spends money during the year.
• Finally, so that the Town Council could arrive at a reserve strategy for the town, the risks were considered as a group. The advantages were that it is unlikely that the Town will experience a deep recession, a severe hurricane, and a severe flood, all within a short time, and not all the risks have an equal chance of occurring over a given period. The GFOA did note, however, that it is entirely possible that events could “stack,” that is, more than one event could occur in a single year, greatly stressing reserves.

Considering all the risks as a group meant also that the town could look at “risk interdependencies.” This simply meant that the occurrence of one risk could impact the probability and/or magnitude of a related risk. In Charlestown’s case, one independency is that sea level rise could cause higher capital project spending, which would place more pressure on UFB reserves.

For example, because the 2020 data showed that sea level rise was projected to reach levels that could cause significant damage in Charlestown by 2029 or 2030, the Town would need to make capital investments in response to this sea level rise. Discussed in the report was the projected inundation of 1.1 miles of Charlestown Beach Road at Creek Bridge if sea levels rise 1.5 feet, which will impact approximately 60 residences in Charlestown, making them unreachable by car, and the town will need to remedy this situation.

In addition, there are risks that are unknown (an example being the COVID-19 pandemic) which are not accounted for in the Risk Model, and the analysis was based largely on historical data, which, by definition, does not capture the potential future impacts of global climate change. Finally, the Town might wish to use reserves for purposes other than mitigating risks, such as saving for a capital project (such as raising a portion of Charlestown Beach Road) using cash financing rather than expensive debt.

Deciding how much is in the end enough is a judgment call and depends on how much risk the town is willing to assume. But the decision needs to be informed by rigorous analysis, rather than plucking a number out of thin air.

The banner image is of Hurricane Irene. Irene was a large and destructive tropical cyclone which affected much of the East Coast of the United States during late August 2011. By the time it hit Rhode Island it was reduced to a Tropical Storm, but still did major local damage. President Obama declared that a major disaster existed in Washington County and other parts of Rhode Island. This declaration made Public Assistance requested by the Governor available to eligible local governments. The current administration is much less likely to declare disasters, and extremely unlikely to declare a tropical storm a disaster. In that case the Town may be on its own and dependent on its financial reserves.