Board of Finance Regular Meeting Agenda

15 Rope Ferry Road  •  P.O. Box 284  •  Waterford, CT  06385 
Phone: 860-444-5801 •  Fax: 860-444-5870  •  www.waterfordschools.org                                       
 
 
 
 
 
 
 
 
 
To: 
Board of Selectmen Members 
From: 
Thomas W. Giard III, Superintendent 
Re: 
Request for Special Appropriation for Reading Textbooks 
Date: 
January 2, 2024 
 
On December 1, 2023, Waterford Public Schools was notified by the Connecticut State Department of 
Education that our K-3 Reading Waiver was approved.  There were 85 school districts who requested 
the reading waiver and 17 were approved.  This means that instead of purchasing an entire reading 
program, we will keep our existing materials for phonological and phonemic awareness, phonics, 
rapid automatic naming, and letter naming fluency the same and just adopt a reading textbook, the 
Wit and Wisdom textbook for grades K-5.  This text supports vocabulary development and reading 
comprehension.  In a proactive measure, we currently have a third of our K-5 classrooms piloting Wit 
and Wisdom in the 2023-2024 school year.  The district’s waiver was based on the adoption of Wit 
and Wisdom. 
 
As you will recall from last budget season, when our faculty reviewed the six state approved reading 
programs, the one we would have selected cost about $600,000 for K-3. This would be at least 
$800,000 for K-5.  Since we are just replacing reading texts, the total cost for Wit and Wisdom for 
grades K-5 is $252,044. 
 
You may also recall from last budget season, because the status of our reading waiver was unclear, 
the discussion and action at the Board of Finance was a reduction of $500,000 in the Board of 
Education budget.  That reduction was reflective of the reading textbooks.  Both Board of Finance and 
RTM members, during budget discussions, asked us to return and seek an appropriation once the 
status of the reading waiver was known.  
Mr. Thomas W. Giard III 
Superintendent of Schools 
  
Mr. Craig C. Powers 
Assistant Superintendent 

 
Great Minds Quote 
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Core Text - Kit 
    ISBN 
Quantity 
List Price 
Discount 
Total Price
Grade K 
 
 
Wit & Wisdom Core Text Library 
Grade K (20) - Basic 
978-1-64929-302-2 
11.00 
$2,002.54
30.00%
$15,419.56
Grade 1 
 
 
Wit & Wisdom Core Text Library 
Grade 1 (20) - Basic 
978-1-64929-311-4 
11.00 
$2,075.47
30.00%
$15,981.12
Grade 2 
 
 
Wit & Wisdom Core Text Library 
Grade 2 (20) - Basic 
978-1-64929-320-6 
9.00 
$1,760.16
30.00%
$11,089.01
Grade 3 
 
 
Wit & Wisdom Core Text Library 
Grade 3 (20) - Basic 
978-1-64929-329-9 
9.00 
$1,680.04
30.00%
$10,584.25

Grade 4
Wit & Wisdom Core Text Library 
Grade 4 (20) - Basic 
978-1-64929-338-1 
9.00 
$1,632.01
30.00%
$10,281.66
Grade 5 
 
 
Wit & Wisdom Core Text Library 
Grade 5 (20) - Basic 
978-1-64929-347-3 
9.00 
$1,076.05
30.00%
$6,779.12
Geodes - Digital 
    ISBN 
Quantity 
List Price 
Discount 
Total Price
Grade Multiple 
 
 
My Geodes (digital) K-2 XL School 
License: Service End Date (6/30 of 
School Year 2023 - 2024 unless 
noted otherwise) 
GM-02300 
3.00 
$1,075.00
16.00%
$2,709.00
Geodes - Kit 
    ISBN 
Quantity 
List Price 
Discount 
Total Price
Grade K 
 
 
Geodes Level K: Print Classroom 
Kit (20)
978-1-64497-700-2 
11.00 
$3,695.00
16.00%
$34,141.80
Grade 1 
 
 
Geodes Level 1: Print Classroom 
Kit (20) SP 
978-1-64497-400-1 
11.00 
$3,695.00
16.00%
$34,141.80
Grade 2 
 
 
Geodes Level 2: Print Classroom 
Kit (20) SP 
978-1-64497-408-7 
9.00 
$3,695.00
16.00%
$27,934.20
Wit and Wisdom - Digital 
    ISBN 
Quantity 
List Price 
Discount 
Total Price
Grade Multiple 
 
 
Wit & Wisdom (InSync) Grades K-8 
Digital Teacher Edition (Not 
Available Standalone): Service End 
Date (6/30 of School Year 2023 - 
2024 unless noted otherwise) 
GM-01326 
58.00 
$199.50
47.89%
$6,029.10
Wit & Wisdom in Sync License 
(Print/Digital School Yr): Service 
End Date (6/30 of School Year 
2023 - 2024 unless noted 
otherwise) 
GM-01288 
990.00 
$10.50
50.00%
$5,197.50
Wit and Wisdom - Kit 
    ISBN 
Quantity 
List Price 
Discount 
Total Price
Grade K 
 
 
Wit & Wisdom 2023 Grade K 
Student Edition Set (Modules 1-4) 
979-8-88588-706-9 
180.00 
$21.61
3.00%
$3,773.11

Wit & Wisdom 2023 Grade K 
Teacher Edition Print Bundle
979-8-88811-368-4
11.00
$225.47
3.00%
$2,405.76
Wit & Wisdom 2023 Grade K 
Assessment Pack Set Modules 1-4 
979-8-88588-711-3 
11.00 
$258.46
3.00%
$2,757.77
Grade 1 
 
 
Wit & Wisdom 2023 Grade 1 
Assessment Pack Set Modules 1-4 
979-8-88588-722-9 
11.00 
$258.46
3.00%
$2,757.77
Wit & Wisdom 2023 Grade 1 
Student Edition Set (Modules 1-4) 
979-8-88588-717-5 
170.00 
$21.61
3.00%
$3,563.49
Wit & Wisdom 2023 Grade 1 
Teacher Edition Print Bundle 
979-8-88811-369-1 
11.00 
$225.47
3.00%
$2,405.76
Grade 2 
 
 
Wit & Wisdom 2023 Grade 2 
Teacher Edition Print Bundle 
979-8-88811-370-7 
9.00 
$225.47
3.00%
$1,968.35
Wit & Wisdom 2023 Grade 2 
Student Edition Set (Modules 1-4) 
979-8-88588-728-1 
150.00 
$21.61
3.00%
$3,144.26
Wit & Wisdom 2023 Grade 2 
Assessment Pack Set (Modules 1-
4) 
979-8-88588-733-5 
9.00 
$258.46
3.00%
$2,256.36
Grade 3 
 
 
Wit & Wisdom 2023 Grade 3 
Teacher Edition Print Bundle 
979-8-88811-371-4 
9.00 
$225.47
3.00%
$1,968.35
Wit & Wisdom 2023 Grade 3 
Student Edition Set  (Modules 1-4) 
979-8-88588-739-7 
175.00 
$21.61
3.00%
$3,668.30
Wit & Wisdom 2023 Grade 3 
Assessment Pack Set (Modules 1-
4) 
979-8-88588-744-1 
9.00 
$258.46
3.00%
$2,256.36
Grade 4 
 
 
Wit & Wisdom 2023 Grade 4 
Assessment Pack Set (Modules 1-
4) 
979-8-88588-755-7 
9.00 
$258.46
3.00%
$2,256.36
Wit & Wisdom 2023 Grade 4 
Student Edition Set (Modules 1-4) 
979-8-88588-750-2 
165.00 
$21.61
3.00%
$3,458.68
Wit & Wisdom 2023 Grade 4 
Teacher Edition Print Bundle 
979-8-88811-372-1 
9.00 
$225.47
3.00%
$1,968.35
Grade 5 
 
 
Wit & Wisdom 2023 Grade 5 
Student Edition Set (Modules 1-4) 
979-8-88588-761-8 
150.00 
$21.61
3.00%
$3,144.26
Wit & Wisdom 2023 Grade 5 
Teacher Edition Print Bundle 
979-8-88811-373-8 
9.00 
$225.47
3.00%
$1,968.35
Wit & Wisdom 2023 Grade 5 
Assessment Pack Set (Modules 1-
4) 
979-8-88588-766-3 
9.00 
$258.46
3.00%
$2,256.36

Kit
$264,199.29
Digital
$25,191.00
Solution Subtotal
Discount
$289,390.29
($61,124.19)
Shipping and Handling
$23,777.94
*Pre-Tax Solution Total
$252,044.04
               Estimated Sales Tax 
$0.00
                Estimated S&H Tax 
$0.00 
Total Solution:
$252,044.04
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A Multimillion-Dollar Question
SHOULD WE RETHINK 
RESERVES?
For more information, visit gfoa.org/rethinking-budgeting

gfoa.org/rethinking-budgeting
© 2023 Government Finance Officers Association 
ABOUT THE AUTHORS
	 Shayne C. Kavanagh, Senior Manager of Research, Government Finance Officers Association (GFOA)
	 Vincent Reitano, PhD, Associate Professor - School of Public Affairs and Administration, Western Michigan University
	 Peter A. Jones, PhD, Associate Professor - Department of Political Science and Public Administration, The University 
of Alabama at Birmingham
ACKNOWLEDGMENTS
	 Judith M. Marte, Deputy Superintendent, Operations, Broward County Public Schools
	 Kevin A. Knutson, Assistant County Administrator, Pinellas County - Office of the County Administrator
	 Josh Harwood, Fiscal & Tax Policy Director, METRO
	 David Allen Hines, Director of Operations, City of Pittston
	 Ian Tyson, Senior Managing Consultant, PFM Financial Advisors
	 Katie Sabo, Managing Director, Public Sector Partnership, Aon
	 Sam Savage, Executive Director, ProbabilityManagement.org
	 Caroline Kousky, Associate Vice President for Economics and Policy, Environmental Defense Fund
	 Christoper Forster, Assistant Town Manager, Town of Bluffton
	 Timothy Blake, Managing Director, Moody’s Investor Service
	 Shayne Kavanagh, Senior Research Manager, GFOA
	 Chris Morrill, Executive Director, GFOA
	 Mike Mucha, Director, Deputy CEO, RCC Center, GFOA
	 Katie Ludwig, Director of Resource Development, GFOA
	 John Fishbein, Senior Program Manager, GFOA
	 Jake Kowalski, Consultant/Analyst, GFOA
	 Kyle Wedberg, Senior Manager, GFOA
	 Chris Williams, Consultant, GFOA
ABOUT GFOA
The Government Finance Officers Association (GFOA) represents over 21,000 public finance officers throughout the 
United States and Canada. GFOA’s mission is to advance excellence in government finance. GFOA views its role as 
a resource, educator, facilitator, and advocate for both its members and the governments they serve and provides 
best practice guidance, leadership, professional development, resources and tools, networking opportunities, award 
programs, and advisory services.
ABOUT THE RETHINKING BUDGETING PROJECT
Local governments have long relied on incremental, line item budgeting where last year’s budget becomes next 
year’s budget with changes around the margin. Though this form of budgeting has its advantages and can be useful 
under circumstances of stability, it also has important disadvantages. The primary disadvantage is that it causes local 
governments to be slow to adapt to changing conditions. The premise of the “Rethinking Budgeting” initiative is that 
the public finance profession has an opportunity to update local government budgeting practices to take advantage 
of new ways of thinking, new technologies, and to better meet the changing needs of communities. The Rethinking 
Budgeting initiative will raise new and interesting ideas like those featured in this paper and will produce guidance 
for state and local policy makers on how to local government budget systems can be adapted to today’s needs. We 
hope the ideas presented in this paper will spur conversation about the possibilities for rethinking budgeting. The 
Rethinking Budgeting initiative is a collaborative effort between the Government Finance Officers Association (GFOA) 
and International City/County Management Association (ICMA).
To learn more, visit gfoa.org/rethinking-budgeting.

SHOULD WE RETHINK RESERVES?
1
Introduction and How to Use This Paper
The “Best Practices: Fund Balance Guidelines for the General Fund” is one of GFOA’s most often cited 
standards. However, GFOA’s consulting work with local governments has revealed that there are many 
opportunities for reserve optimization beyond the guidance provided in the Best Practices. This paper 
brings what we have learned together with university research to describe new opportunities for local 
governments to get the best value from their reserve strategies. 
To help readers navigate to the parts of this paper that will benefit them most, we have summarized 
each of the main sections of this paper. If the summary of a section is sufficient for you, we invite you to 
skip the details of that section.
Section 1—Why Might We Need to Rethink Reserves? 
We give four reasons. First, we live in an increasingly volatile and uncertain world. More uncertainty 
gives rise to more risk. Reserves are one of the tools used to manage risk, chiefly by “self-insuring” 
against certain risks. More risk means we need better reserve strategies. Second, the public has lower 
trust in government and experts. This means that governments will face more pressure to justify 
holding reserves and will be less able to appeal to claims of professional expertise as justification. Third, 
government is becoming more resource constrained, which means that all dollars, including reserves, 
must be used with increasing savvy. Fourth, technology makes it easier to analyze reserve strategies 
and optimize the strategy to the conditions faced by each local government. 
JUMP TO SECTION 1 
RESERVES VS. FUND BALANCE
“Fund balance” is an accounting term that, generally speaking, describes the difference 
between assets and liabilities. “Reserves” is a budget and policy term that describes the 
fungible resources available outside of the budget for use if the resources appropriated inside 
of the budget are insufficient. There is an overlap between “fund balance” and “reserves,” but 
the most important difference is that fund balance covers a broader range of resources. For 
example, fund balance could include prepaid inventories or receivables for delinquent taxes, 
neither of which is available for current spending.* This paper is focused on the budget and 
policy role of reserves.
* The Governmental Accounting Standards Board (GASB) provides guidance on how to classify fund balances to differentiate between 
amounts that are more constrained or less constrained in their potential use. You can read more about these classifications in: “GASB 
Statement No. 54, Fund balance reporting and governmental fund type definitions,” available at GASB.org.

2
SHOULD WE RETHINK RESERVES?
Section 2—How Do We Rethink Reserves? 
We start by changing our mental model. A mental model is a way of viewing the world. Finance officers 
can help decision-makers make better decisions by giving them better mental models for public finance. 
The traditional mental model for reserves is a “savings account.” We contend that an “insurance policy” 
has much to offer as a new and complementary mental model. This connects reserves directly to their 
role in managing risk and opens up new ways of thinking about reserves. 
JUMP TO SECTION 2 
Section 3—What Actions Can We Take to Rethink Reserves? 
The actions below are critical to taking full advantage of the possibilities available from the reserves as 
insurance mental model. The ideas are presented in a rough order of importance.
1. 	 Risk-Based Reserve Analysis. A perennial question in local government finance about reserves is 
“how much is enough?” The reserves as insurance model would say it depends on what your risks are. 
We’ll discuss different options for how local governments can take account of their risks.
2. 	Develop a Comprehensive Reserve Policy. A policy helps the government commit to savvy decision-
making about reserves by showing why a smart risk-informed reserve strategy is good for the 
community and defining the boundaries of acceptable actions around reserves. Most important, a 
policy should address the amount in reserves that a local government will strive to maintain, including 
a minimum and maximum amount.
3. 	Optimize the Combination of Commercial Insurance and Self-Insurance. Commercial insurance 
and self-insurance each have advantages that can complement the other. If we think of reserves as 
self-insurance, it opens up new ways of thinking about the application of commercial insurance to the 
risks that local governments face. By using a risk-based approach to identify how much and for what 
severity of events reserve funds are needed, it becomes easier to identify pricing efficiencies between 
holding funds and purchasing private insurance. 
4. 	Optimize Investment Strategies. Reserves are constituted by cash held back from current spending. 
Knowing how much cash is necessary to keep liquid to provide reasonable assurances for unplanned, 
unavoidable expenditures tells you how much can be invested in long-term, less liquid but higher yield 
instruments.
5.	 Pool Risk. Local governments often participate in external risk pools to save money. Local 
governments may have unrealized internal risk pooling opportunities. The reserves as insurance model 
highlights these opportunities. 
6. 	Understand Bond Ratings and Reserves. Bond ratings are often used as a reason to maintain high 
reserves. However, the interest rate advantage will only be justified under certain conditions. Reserves 
as insurance asks us to consider if higher reserves are “worth” the cost to obtain a higher bond rating. 
JUMP TO SECTION 3 

SHOULD WE RETHINK RESERVES?
3
SECTION 1
Why Might We Need to Rethink Reserves?
Reserves are the liquid financial resources* that local governments do not include in the annual spending 
plan. These resources are held back from the budget and held in “reserve” for some other purpose. The 
most important purpose is to respond to significant, unplanned, unavoidable costs or revenue losses, 
such as a natural catastrophe or recession. Another common purpose is as a sinking fund or “piggy 
bank” for a large, nonrecurring, planned future expenditure, like purchasing a capital asset. Reserves 
also support a strong bond rating by signaling to investors that the local government has resources to 
pay back debt even with potential disruptions to its financial position.
It has long been thought that having substantial reserves is desirable. Often it is thought that bigger is 
better. So why might we need to rethink reserves? The reasons are consistent with many of those cited 
for GFOA’s Rethinking Budgeting initiative. Though, these reasons take on special significance when 
applied to reserves.
An increasingly volatile and uncertain world. Reserves play a role in buffering local government from 
volatility. However, if volatility is increasing, we should reexamine how reserves are managed to ensure 
local government has an adequate buffer. For example, damages from natural disasters have been on 
the rise in recent decades.1 Reserves fund the response to natural disasters. Even if federal or state/
provincial financial assistance is available, reserves fill the gap until assistance arrives, which can take 
months or even years. 
Lower trust in government and experts. Local government’s stakeholders may be suspicious of large 
reserves, especially if it is not clear why the government is holding these resources instead of spending 
them on current services or cutting taxes.2 In the past, the expert opinion of the finance officer, perhaps 
citing GFOA’s “Best Practices,” might have been sufficient to justify reserves, but expert opinion may not 
be so readily accepted in the future.3 Finance officers may need to be prepared to provide justification 
for reserves that rely less on appeals to expertise and more on the fundamental reasons why reserves 
are important.
* Typically comprising cash and investments that can be converted into cash.

4
SHOULD WE RETHINK RESERVES?
Local governments are becoming more resource constrained. Local governments are expected to 
maintain a sizable reserve by “industry standards” and by bond rating agencies.* At the same time, 
local governments are facing more resource constraints, especially with employee health care and 
pension costs rising. For many governments, the increases in costs have consumed revenue increases, 
which may soon level off. † In fact, some economists believe that the United States’ long-term growth 
trajectory will slow; indeed, the general trend has been slowing growth since the 1970s.4 Further, long-
term demographic trends point toward an aging population. Though the United States’ demographic 
outlook is not as dire as other developed countries, an aging population still does not bode well for 
local government revenues.5 In addition, legislative constraints limit revenue growth. For example, there 
is evidence that local government revenues do not recover as quickly from setbacks, like recessions, 
compared to the past, due to legislative constraints.6  
Rising costs paired with stagnating revenue growth means 
that local governments need to make efficient use of 
resources, including reserves. Building reserves is a use 
of current revenues, and governments need to weigh 
the opportunity costs of doing so. Is it better to provide 
services today or save the money for later? 
None of this suggests that local government reserves 
should always and everywhere be lower than they are 
today. Instead, we should look for more and better options 
to provide buffers to local governments than reserves have 
traditionally provided. For example, are there opportunities 
to make more cost-effective combinations of commercial 
insurance and reserves? This might not always lead to reserves going down. In fact, it could call for 
reserves to be increased as part of a high-deductible insurance strategy for some perils to reduce the 
total cost of risk (insurance plus reserves). 
Information technology makes rethinking reserves easier. Information technologies, like some we will 
describe later in this report, make it easier to analyze reserve strategies and optimize the strategy to the 
conditions faced by each local government. 
In the next section, we will discuss how to rethink reserves, with emphasis on the reserve’s role in 
managing risk. In Section 3, we will suggest several actions local governments can take to rethink their 
reserves and get better value from reserves for their communities.
* GFOA’s “Best Practices: Fund Balance Guidelines for the General Fund” recommends that, at a minimum,  general-purpose governments, 
regardless of size, maintain unrestricted budgetary fund balance in their general fund of no less than two months of regular general fund 
operating revenues or regular general fund operating expenditures. Moody’s Rating Agency looks for fund balances above 35% of annual 
revenue to provide a Aaa rating for General Obligation debt.
† Note: We are not referring to the impact of economic cycles (e.g., recessions) but rather the long-term trend across cycles.
Building reserves is a use 
of current revenues, and 
governments need to weigh 
the opportunity costs of 
doing so. Is it better to 
provide services today or 
save the money for later? 

SHOULD WE RETHINK RESERVES?
5
SECTION 2
How Do We Rethink Reserves?
We begin rethinking reserves by starting from “first principles”—that is, why do local governments 
have reserves in the first place? The answer is to reduce volatility and uncertainty in public finances. 
Uncertainty exposes a government to financial risks. GFOA has found that framing the reserve explicitly 
as a risk management tool and linking the reserve to concrete risks that decision-makers can appreciate 
is a great way to communicate why reserves are important. Let’s examine the key risks that reserves 
guard against. We will see that there are many possible risks, and it is difficult, if not impossible, to buy 
commercial insurance to protect against many of them. 
Cash flow risk is a concern, especially for governments where a major revenue source, like property taxes, 
is received only once or twice a year in large chunks, while expenditures occur evenly throughout the 
year. A similar problem can occur if large portions of state-shared revenue have to be authorized by the 
state each year through the state budget process. Delays in approving the state budget could result in 
delays in local government revenues. Reserves help smooth out resource availability and have important 
advantages over other options like tax anticipation notes (TANs). TANs can entail the risk of high interest 
rates, for example.
A big risk for many governments is revenue instability, with recessions being the major culprit. If a 
recession dramatically reduces revenue, then reserves can be used to help a government make a “soft 
landing.” For example, the City of Savannah’s sales tax was a large revenue source that was sensitive to 
the economy. The city, therefore, developed a sales tax stabilization reserve. When the Great Recession 
hit, the city was able to draw from the reserve and avoid layoffs.
RETHINKING IS LOCAL
Each local government will need to decide how to best apply the ideas in this paper to their 
circumstances. For example, a local government’s “reserves” are commonly associated with the 
general fund. Yet, many of the same ideas presented in this paper could apply to other funds, like 
enterprise funds.

6
SHOULD WE RETHINK RESERVES?
There could be other sources of revenue instability, too. Perhaps a major revenue source is subject to 
changes in the political environment, as in the case of some state-shared revenue. It might also be the 
case that a local revenue source is subject to periodic reapproval by the voters. In one city the GFOA 
worked with, the potential for a major industrial employer to close was a risk because the city relies 
heavily on a local income tax. 
Historically, reserves have not consistently been used by local governments to offset revenue losses 
from a recession.7 This has been, perhaps, the result of state and federal government support during 
the last two recessions that came through the American Recovery and Reinvestment Act of 2009 
and the American Rescue Plan Act of 2021. While these pieces of legislation were a major help to 
local government fiscal health, local governments should not expect these to be available in future 
recessions. Recovery funds require Congress to 
pass major legislation, and the rise of political 
polarization and gridlock makes this far from 
guaranteed. Even if the federal government offers 
relief, future funding might have restrictions, and it 
will be impossible for local governments to predict 
how much money they will receive. Hence, local 
governments would be wise to prepare to handle 
the impacts of recession on their own. Reserves 
provide another option, besides spending cuts.
Another major risk category is natural disasters like 
earthquakes, wildfires, floods, hurricanes, and the 
like. These can result in urgent needs like overtime 
for first responders or shelter, food, and supplies for displaced families. They also sustain recovery 
from disasters by covering unforeseen expenditures like the cleanup that follows the initial devastation. 
Sometimes, a local government will have some of its costs reimbursed by the Federal Emergency 
Management Agency (FEMA) and/or state agencies. If this is the case, reserves are still important to 
cover the nonreimbursable costs, including lost revenue and fees and increased operating costs, while 
also fronting the costs until reimbursement arrives. GFOA sampled several local governments that 
received FEMA reimbursement for natural disasters and found it took an average of 18 months to be 
reimbursed. 
Some extreme weather events might not be declared an “emergency” by national or state government. 
In this case, the local government may be on its own. A common example of this is an extreme snow 
season where an unusually large amount of snow may cause the local government to dramatically 
exceed its snow removal budget. Reserves could be used to fund the overage and be replenished by 
surpluses from light snow seasons.
Man-made disasters are also a risk. The possibility of hazardous material spills that cost a lot to clean 
up is one such risk that can have a material impact on local finances. Cyberattacks are another example 
of a man-made risk that might have implications for reserves. As of this writing, cyber insurance 
policies are becoming more expensive or totally unavailable to some governments. So a government 
might need to raise the deductible on a commercial policy or forgo a policy altogether. In this case, 
the government is self-insuring against cyberattacks either partially or fully, and reserves provide 
the financial backing. Capital infrastructure also presents risks that reserves can help mitigate. Debt 
is a powerful tool for local governments to finance infrastructure acquisitions, and reserves provide 
assurances to creditors that the local government is not at unacceptable risk of default. Reserves can 
also be used to pay for capital assets directly (i.e., cash financing).
GFOA has found that framing 
the reserve explicitly as a risk 
management tool and linking 
the reserve to concrete risks that 
decision-makers can appreciate 
is a great way to communicate 
why reserves are important.

SHOULD WE RETHINK RESERVES?
7
There may be other risks we haven’t covered that might be relevant to reserves. These risks might fall 
into categories of financial/economic, health crises, security, reputational, and more. Here are a few 
examples from governments the GFOA has worked with to analyze their risk exposure. You might think 
of others that are relevant to your jurisdiction.
	 Financial/economic: For governments with large pension liabilities, a reduction in the rate of return 
on pension investments could increase the annually required pension payment.8 Reserves could be 
used to smooth out the impact on the budget. 
	 Public health: The COVID-19 pandemic is an extreme example of the potential financial impact 
of a health event. Less extreme outbreaks could still have financial impacts. For example, local 
governments with public health responsibilities in urban areas could face large costs from local 
outbreaks of serious diseases, like hepatitis. 
	 Public safety: Terrorism and civil disorder can cause a spike in public safety costs. It is worth noting 
that civil disorder events could become more difficult to insure against because social media can 
spread civil disorder beyond a local phenomenon.9 In other words, civil disorder in one community 
can easily spread to others. Insurance companies try to avoid insuring risks where this kind of 
“domino effect” is in play.
Recognizing that reserves are essentially a tool for risk management leads to our next point on how to 
rethink reserves: Adjust your mental model. 
A mental model is a way in which we view the world. Mental models guide how we make decisions. If 
public finance officers can give decision-makers a better mental model, they will make better decisions. 
The traditional mental model for reserves is a savings account. 
Indeed, the savings account has several advantages as a mental model. First, it’s an easy analogy to 
grasp for people who are not public finance experts. Second, it has a seemingly obvious parallel to the 
personal lives of local governments’ stakeholders. This is particularly true for the “sinking fund” function 
of reserves, as most people have experience with building up their personal savings to pay for some 
consumer expenditure or personal investment (e.g., education, house, car, etc.).
However, the savings account model has disadvantages as well. 
First, the analogy to personal savings as a buffer against risk might not be as powerful as it seems. Personal 
savings rates have been in long-term decline.10 Not only that, but most consumers also start saving reactively, 
after an adverse event has occurred (e.g., recession, pandemic). Obviously, this is not a viable strategy for 
local government reserves.11 Given the reactive strategy that most savers adopt, it is not surprising that 
most Americans are well short of the amount of personal savings that personal finance experts recommend 
keeping for an emergency.* Given the lack of emphasis on saving for an emergency, many people may now 
see personal savings more as a vehicle for saving up for future purchases than as a way to manage risk.12  
RESERVES AREN’T ALWAYS THE ANSWER
We must recognize that reserves are not the best way to manage all of the consequences of 
the risks local governments are subject to. Let’s take pensions. Though reserves could be used 
to cushion the initial shock from a reduced rate of return and consequent increase in required 
annual contributions, a government will, at some point, need to realign its annual spending to 
accommodate increased pension costs.
* The average American’s monthly expenses are $5,111. Fifty-one percent of Americans have less than $5,000 in savings. Personal finance 
experts recommend more than one month’s worth of expenditures, with three months regarded as the minimum. Information taken from: 
Backman, M. (2022, May 9). Study: Average American’s savings account balance is $4,500. The Ascent. https://www.fool.com/the-ascent/
research/average-savings-account-balance

8
SHOULD WE RETHINK RESERVES?
There is evidence that financial managers are more likely to view their own personal savings as a tool 
for managing risk compared to the average person. This means that the “saving account” metaphor for 
reserves may be more impactful in the minds of financial managers than it is for other people.13
Second, the savings account mental model implies that having more in your account is better. However, 
this is not always true with local government reserves. Local governments are faced with opportunity 
costs that are different from private individuals. Monies placed in reserves are resources that are 
removed from the private economy. It can be argued that excess* reserves could do better for the 
community if those resources were put to work in the private economy. Even if excess reserves weren’t 
returned to the private economy, a good argument could be made that the excess amounts should be 
used by the government to benefit the current generation of taxpayers (the ones who provided the 
money to create the reserve). Further, there are diminishing returns to putting aside money to offset 
risk. We will mathematically demonstrate this later in this paper. For now, a simple thought experiment 
will do. Imagine a person had $10,000 in their savings account to offset personal risk. This is a healthy 
amount, but it is not hard to imagine circumstances where this amount proves insufficient. Now 
imagine another similar person had $1 million in their savings account. It is much harder to imagine 
the circumstances where this would be insufficient. Now imagine each person was given an additional 
$10,000. It is easy to see how the first person could better insulate themselves from risk by using this 
money to build their savings. It would be hard to argue that the second person would experience an 
equal gain in risk mitigation from building their savings further. The $10,000 creates greater marginal 
benefit for the first person than the second. The same logic applies to government. We will address 
how to identify the point at which excess has been reached later, including establishing for floor and 
ceiling amounts on the desired level in reserves. 
If the savings account mental model has important limitations, what is the alternative? We propose 
insurance as a new mental model. This does not necessarily replace the savings account model 
but does supplement it by providing a new and better perspective on some of the most important 
purposes of a reserve.
Insurance has an obvious parallel to people’s personal lives. Given that local governments hold 
reserves to manage risk, insurance is an accurate analogy for reserves. Further, insurance is purchased 
proactively, before an adverse event occurs; much like reserves must be built up ahead of time to 
prepare for future, unpredictable adverse events. 
Another advantage of insurance as a mental model is that it invites local governments to think about 
how commercial insurance and self-insurance can work together for an optimized risk financing 
strategy. Reserves are a self-insurance strategy, but commercial insurance policies (those purchased 
from a broker) can supplement reserves. For example, commercial insurance could be useful for 
protecting against low probability but extreme consequence events. Later in this report, we will 
discuss specialized insurance policies called “parametric” insurance that are designed to provide the 
policyholder with compensation in the event of an extreme event. 
RESERVES AS INSURANCE AND THE ELECTED BOARD
One author of this paper was part of a discussion with a city council about reserve strategy. 
One council member asked what the practical implications of spending the reserve would be. 
Reserves as insurance would point out that lower reserves would be the equivalent of taking a 
lower limit (or higher deductible) on your insurance policy. Reserves as savings account struggles 
with this question because an increasingly prevalent view is that savings exist to be spent. 
* Of course, defining the point of excess is key. We will address that later in this paper.

SHOULD WE RETHINK RESERVES?
9
Using insurance as a mental model also implies that there is an optimal amount to have on hand. 
Nonexperts can appreciate that it is possible to either overinsure or underinsure the risks that you face. 
Insurance also implies that there is a point at which the “policy” should be used. Let’s consider recessions 
as an example. Recessions are the most important source of financial instability for local governments, 
so reserves can play a crucial role in counteracting downturns in economic cycles. However, there is 
little evidence that local governments use reserves during times of economic recessions.14 In the Great 
Recession, the 30 largest U.S. cities used their fiscal reserves, but only 25% of the 600 smaller cities 
studied drew down their reserves (the remaining cut spending).15 Failure to use reserves likely caused 
distress to the community in the form of interruption to public services. While local governments should 
consider spending cuts during a revenue downturn, a strong reserve can help avoid the most damaging 
spending cuts. 
The insurance mental model is not without its disadvantages, though. Insurance can be an abstract and 
difficult concept to grasp, even in our personal lives. This means people sometimes don’t make optimal 
personal decisions about insurance, just like they make suboptimal decisions about personal savings. 
Another disadvantage is that the analogy becomes more complicated when commercial insurance and 
intergovernmental aid is considered. Taking these other risk management tools into account is necessary 
for an optimal risk management strategy, but the trade-off is additional complexity.
The reserves as insurance mental model addresses the risk management function of reserves well. The 
reserves as savings account mental model addresses the “sinking fund” function of reserves, so we do 
not suggest discarding the savings account mental model entirely. Rather, putting these two models 
together offers a more comprehensive perspective on the role of reserves. 
Reserves as Insurance 
+
Reserves as Savings Account
=
Savvy  
Financial 
Strategy
Addresses reserve’s role in 
guarding against risks like 
revenue instability, catastrophic 
events, and cashflow instability. 
Addresses reserve’s role in  
accumulating cash to pay for  
future costs that would not be 
affordable within a single year’s 
revenue. A capital asset is an 
example of such a cost.
Provides a lens that encourages  
new and savvy ways to manage 
risk across the government.
Provides a lens that encourages 
multiyear financing strategies for  
large costs.
With better mental models in place, we are positioned to think about the actions we can take. 

10
SHOULD WE RETHINK RESERVES?
SECTION 3
What Actions Can We Take to Rethink Reserves?
In this section, we’ll look at the steps local governments can take to rethink reserves. We’ve summarized 
the major ideas and will discuss them in detail immediately after. The ideas are presented in a rough order 
of importance. 
1. 	 Risk-Based Reserve Analysis. A perennial question in local government finance about reserves is 
“how much is enough?” The reserves as insurance model would say it depends on what your risks are. 
We’ll discuss different options for how local governments can take account of their risks.
2. 	Develop a Comprehensive Reserve Policy. A policy helps the government commit to savvy decision-
making about reserves by showing why a smart risk-informed reserve strategy is good for the 
community and defining the boundaries of acceptable actions around reserves. Most important, a 
policy should address the amount in reserves that a local government will strive to maintain, including 
a minimum and maximum amount.
3. 	Optimize the Combination of Commercial Insurance and Self-Insurance. Commercial insurance 
and self-insurance each have advantages that can complement the other. If we think of reserves as 
self-insurance, it opens up new ways of thinking about the application of commercial insurance to the 
risks that local governments face. By using a risk-based approach to identify how much and for what 
severity of events reserve funds are needed, it becomes easier to identify pricing efficiencies between 
holding funds and purchasing private insurance. 
4. 	Optimize Investment Strategies. Reserves are constituted by cash held back from current spending. 
Knowing how much cash is necessary to keep liquid to provide reasonable assurances for unplanned, 
unavoidable expenditures tells you how much can be invested in long-term, less liquid but higher yield 
instruments.
5.	 Pool Risk. Local governments often participate in external risk pools to save money. Local 
governments may have unrealized internal risk pooling opportunities. The reserves as insurance model 
highlights these opportunities. 
6. 	Understand Bond Ratings and Reserves. Bond ratings are often used as a reason to maintain high 
reserves. However, the interest rate advantage will only be justified under certain conditions. Reserves 
as insurance asks us to consider if higher reserves are “worth” the cost to obtain a higher bond rating. 

SHOULD WE RETHINK RESERVES?
11
Risk-Based Reserve Analysis
GFOA strongly recommends that local governments adopt a formal policy that describes how much it will 
strive to maintain in its reserve. A perennial question, though, is “how much is enough?” The reserves as 
insurance model would say it depends on what your risks are. 
The first step toward a risk-aware reserve target is to think of the target as a range instead of a single 
point. For example, a government might say, “Our policy is to maintain reserves between 15% and 25% of 
annual revenue,” rather than “…equal to 20% of annual revenue.” A range has several advantages over a 
single point:
	 Risks are difficult or often impossible to estimate exactly. A range expresses that a government must 
have a margin of error to operate within. Conversely, a single point leaves ambiguity over whether 
actual reserves are too high or too low. To take our example: If the government’s policy was based on  
a single point (20%) and the actual reserves were at 17% of revenue, would that be acceptable? What  
if reserves were 27%? Would that be too high? The single-point policy is not clear about boundaries the 
government should stay within.* If the policy was based on the range, we’d know 17% was acceptable 
but 27% was too much. This feature of ranges not only helps with discussions among decision-makers 
about reserve strategies, but it might also help with explaining reserve strategy to the public. 
	 A range accommodates different risk appetites. The “right” level in reserves will be a function of the risks 
a government faces and of local officials’ willingness to bear those risks. A range can accommodate the 
views of risk-averse elected officials and less risk-averse officials. They can find grounds for compromise 
by negotiating a floor and ceiling that accommodates different appetites for risk. 
	 A range better supports the ongoing management of reserves. Reserves fluctuate from year to year.  
If the reserve stays in range, there is little need to revisit whether the actual reserve is too high or  
low. If the reserve falls outside the range, it suggests a clear course of action (i.e., do something to get it 
back in range). This helps make sure that reserves stay where they need to be to manage risks.
	 A range includes a floor that communicates that there is a minimum amount necessary to be a good 
steward of the community but also a ceiling that communicates that there is an upper limit on the 
usefulness of reserves and a point at which excess resources should be devoted to some other purpose.
* Defining boundaries is essential to good financial public finance. See GFOA’s Financial Foundations for Thriving Communities, published 
May 2019.

12
SHOULD WE RETHINK RESERVES?
The next step in developing a risk-aware reserves policy is to analyze the risks the local government is 
subject to. A risk analysis can take place at varying levels of sophistication. A qualitative or subjective risk 
assessment is the most accessible approach. A local government can review categories of risks, like those 
described earlier in this report, and: A) assess their exposure in each category; and B) consider if their 
reserve target accommodates that exposure. GFOA has developed a simple template to facilitate this 
kind of review. 
The City of Berkeley, California, illustrates how the template can be used. The city’s budget staff led the 
risk assessment and included participation from the public works, police, and fire departments. The city 
determined that the greatest exposure was “extreme events and public safety concerns,” particularly 
earthquakes, fires, landslides, floods, hazardous material spills, and terrorism. Other important exposures 
included “expenditure volatility,” due to upcoming large expenditure obligations that did not have a 
funding source, and “other funds’ dependency on the general fund.” The city’s general fund was a 
backstop for other city operations outside of the general fund, so the general fund would be relied 
upon if these operations were to encounter unplanned, 
unavoidable expenditures or revenue interruptions. By 
reviewing all the risks on the GFOA template, Berkeley 
determined that it faced a moderate to high level of risk. 
The template suggested that between 25% and 35% of 
annual revenues would be reasonable to buttress the 
effect of routine downturns in the economy and respond 
quickly and decisively to major emergencies.
The advantage of a qualitative risk analysis is accessibility. 
The City of Berkeley (and many other governments) have 
completed such an analysis within their own resources. A 
qualitative analysis also can be effective for acclimating 
the government to being aware of risk as part of their 
reserve strategy. Berkeley performed the analysis described above in 2016/17. The analysis helped 
convince the city to commit to reexamining its risk exposure five years later, and the city is doing so as of 
this writing (using the more sophisticated chance-based approach we’ll describe later). 
The disadvantage of a qualitative risk assessment is that the results are subjective. This means that there 
is likely to be a gap between: A) the reserve target suggested by the assessment and B) the optimal 
reserve amount, given the risks. There is no way to tell how accurate or inaccurate the subjective estimate 
might be, relative to the optimal amount.
Thus, the next step forward in sophistication is to quantify risks to reach a more objective estimate. A 
local government can look at historical experiences, the analogous experiences of other governments, 
and other sources of data to estimate the potential cost of the risks the local government is subject to. 
A quantified approach might be needed when there is controversy about the right amount in reserves. 
GFOA, for example, has worked with local governments where reserves were low, and an objective 
analysis was needed to see if there was a case for raising them. GFOA has also worked with and heard 
from governments where some felt the reserves might be too high, so an objective analysis was needed 
to see if there was a case for lowering the reserves. 
A risk analysis can take 
place at varying levels of 
sophistication. A qualitative or 
subjective risk assessment is 
the most accessible approach.
GFOA RISK ASSESSMENT TEMPLATE  

SHOULD WE RETHINK RESERVES?
13
The easiest quantified approach to risk analysis is building a model where single numbers are used to 
represent the potential impact of risks. To illustrate, to estimate the risk from recessions, we might look 
back at past recessions to see the losses incurred from those recessions. We would see that the 2008 
Great Recession represents a particularly bad recession. Perhaps revenues decreased by $5 million, which 
might suggest that a $5 million reserve could be necessary to be prepared for most future recessions. 
Outside studies and the experiences of other local governments can also help. The Town of Bluffton, 
South Carolina, used a publicly available university study that calculated the per capita cost to recover 
from hurricanes at different storm category levels.16 The town applied these numbers, adjusted for inflation 
since the study was completed, to derive a figure that the town used as the target number to hold for 
emergency recovery reserves.
The GFOA report “A Risk-Based Analysis of General Fund Reserve Requirements” describes how to 
perform this analysis, including how to account for the possibility of historically unprecedented events.  
The advantage of this “single-number” approach is that many governments should be able to perform 
such an analysis using their own resources. In fact, several governments have contacted GFOA to let us 
know they have followed the methods described in the GFOA report.
The single-number approach has an important disadvantage, though. “Risks,” by defin