As one of the nine School Board members who created and or protected the “ten percent reserve” which ended up at about $23 million in 2007 I endorse this DNT Editorial about how the City of Duluth should handle its unobligated reserves:
There are two obvious sources of cash to pay the bill. One is the $21 million sitting in reserve in the city’s Community Investment Trust, the source for making such payments in the past. The trust was built over the years with the city’s share of revenues from the Fond-du-Luth Casino downtown. But the city’s share of those revenues has been cut off, as has been well-publicized, and the trust has dwindled from about $50 million. While some of the drawdown has been by design (too much cash in such a reserve isn’t financially healthy, either, as it can crimp a city’s ability to borrow and win state and federal aid), a trio of city councilors has stated clearly, they don’t want the fund to be drawn down any further, certainly not below a healthy $20 million.
The other source the city could tap to pay the bill is an unobligated reserve in the city’s general fund. But that’s an option that has Montgomery waving red flags at the City Council and at anyone else who’ll listen. Tapping that fund just to pay a bill is precisely the sort of action that could get the city’s AA bond rating downgraded to A. Those who determine bond ratings specifically have told Montgomery that. It’s on the list of ways to be downgraded.
Tapping the general fund reserve for an emergency like last summer’s flood is one thing. Bonding companies understand having to do that. But using it to pay a bill that comes around every year is quite another thing.
The Duluth School Board has, since Dr. Dixon encouraged the School Board to open a vein, been drawing down the School District’s reserve to the tune of three million a year to pay off the lenders of Red Plan Bonds or to put in operations. The bonds will be repaid over a course of twenty years. This is the last year bond payments can be paid from the fund before even more has to be pulled from school operations (the classroom) to do the job. After Dixon’s run on the reserve is over we will have to take three million out of the classroom to pay the bondholders.
The City Council would be wise to avoid the School Board’s example.