Can Vail balance financial security and funding 3 costly projects?
Town discusses its reserves policy as it budgets for large capital projects and an uncertain future
Vail Daily archive
As Vail prepares for three multi-million dollar capital projects in the next five years, the Town Council is considering alternate financing options to ensure the town’s financial security and sustainability.
While Vail bears varying levels of financial responsibility for each, the town’s roadmap includes the $55 million remodel of Dobson Ice Arena, the $194 million redevelopment of Timber Ridge and the estimated $174 million development of housing at West Middle Creek.
In May, the council discussed various short-term and long-term financing options for these three projects as projections showed concerns about the town’s reserves.
“We knew as we were preparing the budget for this year, we were going to keep a keen eye on cash flow. And as those projects have grown and we’ve gotten real costs with GMPs (guaranteed maximum prices) for those, we wanted to take a real close look at that along with some of the other actions and projects the Town Council has been looking at” said Town Manager Russ Forrest at its May 7 meeting.
“These are all big projects and big issues and have a big impact on the budget,” Forrest added.
Support Local Journalism
What is the financial impact of the projects?
In its May memo, staff shared that with the initial projected expenditures and timelines on Dobson, Timber Ridge and West Middle Creek, its reserves would hit “historically low levels.”
“Actual cash flows are projected to be strained beginning at the end of 2024 through mid-2026, decreasing below the council’s reserve policy of 35% of General Fund revenues,” it added.
As projected, the spending would cause Vail’s general fund to fall $16.7 million short of its reserves policy minimum in 2024.
Vail’s current reserve policy is that the town must maintain a fund balance equal to 35% of its annual General Fund revenues. Vail’s Finance Director Carlie Smith shared on Tuesday, July 2, that this equates to around $22 million and would cover 3.7 months of the town’s operating expenditures.
“As stewards of taxpayer dollars it’s important to have a strong reserve policy that will provide a strong level of protection to the community and those taxpayer dollars should some sort of downturn happen or a catastrophic event,” Smith said.
Vail’s current policy of 35% was implemented in 2020, an increase from 30% in 2019. However, before 2018, the town’s policy had been 25% for some time. A 25% policy equates to around $16 million, Smith noted.
In discussing its various options in May — of which no official financing decisions have been made — the council questioned whether it needed to take another look at its reserves policy.
“I think there’s healthy and fiscally responsible and then I think there’s over-reserved. I’m not saying we’re over-reserved, but that’s something we should just make sure,” said Mayor Travis Coggin in May. “Having a big fund balance but not having any housing, or having a big fund balance and not having a Dobson — does that really serve the purpose of why we’re here as government? We just have to find that right balance.”
Council member Barry Davis added that it would be helpful to understand how the town arrived at 35%.
How much should the town have in the bank?
At its Tuesday meeting, Smith brought more information for the Town Council. This included a review of other peer community reserve policies as well as the impact of a large-scale wildfire or recession.
The Government Finance Association recommends municipalities carry a minimum of two months of operating costs in its reserves, but that this should be adjusted “based on a community’s volatility to events as well as vulnerability to extreme events and impacts to its bond ratings,” Smith said.
“Vail relies heavily on tourism, which makes its reserves and revenues especially highly vulnerable to economic fluctuations and extreme events,” she added.
Other rural resort communities looked at carry reserves policies that range from 25% on the low end to 40% on the high end or that require the municipality to carry somewhere between three to seven months of expenditures.
“Vail is generally in line with what other communities are doing,” Smith said. “If you were to just look at the percentages, you might not think that, but these other towns also have reserves minimums in their other funds. The town only has a reserve policy within its general fund, which means the general fund is really covering all of the other funds.”
Make staying informed the easiest part of your day.
Sign up for daily or weekly newsletters at VailDaily.com/newsletter
In looking at the impacts of historic economic downturns, Smith shared that the town saw a 14% drop in sales tax revenues between 2008 and 2009 during the Great Recession. In addition to the one-year drop, it took four years for the town to return to pre-2008 levels of sales tax revenue. Smith added that overall revenues — such as other taxes, parking fees and more — dropped 24.3% between 2008 and 2009, which didn’t fully recover until 2014.
“During that time, the town cut back on operating expenditures, capital projects, managed staffing vacancies, but did utilize some reserves in RETT and VLMD funds,” she said.
In addition to economic shifts, Vail’s geographic location also makes it vulnerable to large-scale wildfire events, which could have a significant financial impact on the town. This includes the direct suppression costs as well as the long-term costs associated with rebuilding from a fire.
While the monetary impact would be largely unknown, Smith shared a report from the Western Forestry Leadership Coalition that studied the cost of recent wildfires including the Grizzly Creek Fire in Glenwood Canyon and the East Troublesome Fire in Grand County. The report had suppression costs at between $20 million and $230 million.
“It is estimated that 46% of the total costs of a fire are incurred at the local level and that local governments generally front reimbursable costs of disasters an average of 18 months,” Smith shared in her memo to the council.
Coggin argued that in an event like this, changing its reserves policy by 10% would not make a difference.
“If we have a catastrophic fire, the difference between $16 million and $22 million in our bank account is irrelevant in my opinion,” he said.
Rather, Coggin said that the reserves conversation is one of “balancing how much have to borrow and the cost of that borrowing at 25% versus 35%. That to me is the question I would be thinking about as we move forward with these different projects once we finalize how much we think we need.”
“It’s the cost-benefit of that, he added.
Overall, it was the town’s staff recommendation that it maintain the current 35% policy as it “does align with best practices,” Smith said.
Council member Jonathan Staufer said that the “35% cushion, it makes me happy,” and added that the town could consider adding other reserves policies to other funds as well.
So, with the town currently happy with its policy, future discussions are likely to turn back to how to maintain that fund balance as it forges ahead with Dobson, Timber Ridge and West Middle Creek.
